Is all risk bad? How can you tell how much risk you should take, or know when you're not taking ENOUGH risk to earn the return you need? What's more important, risk tolerance or risk capacity?
With 2025's market volatility creating concern and worry for investors, we're exploring why no investment worth making is without risk… and why trying to avoid all risk presents a danger to your ability to grow wealth.
Discover the critical difference between risk tolerance (how comfortable you feel) and risk capacity (what you can actually afford to lose), and why this distinction changes everything about how you should invest.
We also share real stories from our wealth management clients about concentration risk with company stock, the hidden dangers of keeping too much money in cash, and why the "safest" choice often isn't safe at all.
In this episode, you'll hear:
- Why avoiding one type of investment risk (market risk) creates another, potentially more dangerous one to content with
- The difference between risk tolerance and risk capacity and why you have to evaluate both as part of a good investment management strategy
- How to handle concentration risk if you receive equity compensation
- Ways to reduce volatility and overall investment risk (without skipping out on the investment experience!)
- The concept of "lifestyle risk" and unforced errors
How to calculate risk based on your specific goals and timeline
Whether you're dealing with volatile markets, managing equity compensation, or simply trying to understand what level of risk makes sense for your situation, this episode provides a framework for making intentional decisions about where to place your risks—because the goal isn't to eliminate risk, but to manage it strategically.
KEY TAKEAWAYS
#1: No Such Thing as a Free Lunch If You're Trying to Grow Wealth
- Risk and reward have a relationship. You cannot have one without the other.
- Avoiding market risk doesn't eliminate risk, it just creates another; cash will most likely lose purchasing power over time.
- The "safe" choice of avoiding the market can jeopardize big, long-term financial goals
#2: Risk Tolerance and Risk Capacity Are Critical… and Two Different Things
- Risk tolerance = How comfortable you feel emotionally with market ups and downs
- Risk capacity = What you can actually afford to lose based on your timeline and goals
- Your risk capacity often matters more than your risk tolerance for making sound financial decisions
- You may need to take more risk than feels comfortable, or you may not be able to afford the risks you feel emotionally okay accepting
#3: Time Horizon is a Great All-Purpose Risk Management Tool
- There has never been a 15-year rolling period when the U.S. stock market was down
- The longer your investment timeline, the less risk you have of losing money
- Short-term volatility often becomes irrelevant when you're investing for 10+ years
- Warren Buffett made 99% of his wealth after age 60; wealth-building power is found in the long tail of compounding returns
#4: Manage Concentration Risk Strategically
- Don't keep all your wealth tied up in your employer's stock, even if you believe in the company
- Your paycheck already depends on your company's success; being overweight in company stock commits even more of your personal finances and net worth potential to a single company who also happens to employ you
- Consider a rules-base, repeatable, simple strategy for managing your equity comp to steadily build wealth without opening yourself up to more volatility than necessary
- You're not "missing out" if you sell and reinvest! You're locking in gains along the way
#5: Your Biggest Risk as You Build Wealth May Come from Unforced Errors
- A risk you didn't have to take can be the undoing of years, even decades, of hard work in saving and investing
- Calculate the impact of realizing a risk and ask, can you truly afford to see that downside potential? Can you actually recover from the potential loss, and how far back would it set you?
#6: Your Risk Strategy May Need to Evolve with Your Life
- Risk tolerance and capacity change as your life circumstances change (marriage, kids, aging parents); what made sense when you were single may not work when you have dependents
- Regularly reassess your risk strategy as your goals and priorities shift, and know it's okay to become more conservative as you have more to protect
#7: Know What "Enough" Looks Like
- For goals you MUST realize, prioritize probability of success over maximum returns
- Reverse engineer your investment strategy from your actual needs, not from the vast realm of what's possible but not probable
- Know what "enough" looks like so you can make informed trade-offs
Ready to create, use, and enjoy money for life? Request a complimentary consultation with us at BYH and discover how to optimize your investments, reduce your tax burden, and grow your wealth: https://beyondyourhammock.com/schedule
