How Much Investment Risk is Right for You

Tips for Managing Risk in Investing

“Investments involve risk.” 

Not a new concept for anyone who’s ever heard or seen a commercial from any financial adviser. But have you ever stopped to consider what risks they are talking about or how you can mitigate them in through your investment strategy? 

In our last three posts, we talked about not following the crowd, buying value and diversification. Each is part of a risk mitigation strategy but determining the right amount of risk to take is the first step in the process. And that is what we will be discussing in this post.  

Types of Risk 

Tolerance to risk varies from investor to investor and is a very personal decision. However, there are common elements that each investor should take into account. The two most common are systematic and unsystematic risk.  

Systematic risks are those that have effects on the entire market. Things such as wars, pandemics, and recessions are most common. Unsystematic risks are those that affect individual stocks and securities.  

If you take too much risk, your portfolio is susceptible to marketing swings and may not leave you enough time to recover before having to begin withdrawals. On the other hand, if you don’t take enough risk, you could be missing out on long-term gains, leaving your portfolio vulnerable to inflation 

Portfolio diversification can help mitigate both systematic and unsystematic risks by dividing your eggs among several baskets, protecting the overall value from marketing swings.  

Getting Personal 

Here’s where risk becomes personal, and you need to be honest about how much risk you are willing to take. No one wants their portfolio to lose money, but we all know that it will go up and down over time, so you need to ask yourself a couple of questions.  

First, with your long-term goals in mind, do you could withstand swings in value and take the loses in order to pursue the returns. Second, how much risk is necessary in order to meet your goals. The answer to the first question lies within you, while the second can be answered by examining several factors. These include your expectations for return, investment objectives, time horizon and appetite for risk.  

There are asset allocation tools you can use to help you determine the optimal level of risk and many of the most popular begin their calculations by considering your age or time until retirement. While both factors are useful, they are by no means the only and not even the most critical. Other factors to consider are your liquidity needs, net worth and investing priorities.  

Take for instance the idea of decreasing investments in equities and increasing fixed income holdings as you approach retirement age. On its face, the strategy seems not only reasonable but perfectly logical, as well. However, if your allocation strategy is based on age, it is likely that it has not considered longer lifespans, and the effects of inflation. Ignoring both can put you at risk of running out of money.  


Risk tolerance is a tricky thing to determine because it requires being honest with yourself and, if you don’t get it right, you could be leaving yourself open to missing out on gains or living through wild swings in portfolio value that have you reaching for the antacid.  

Finding a financial planner to help you figure out what level of risk is right for you is a worthwhile investment of time and money.  

Buy Value when Investing

Buy Value when Investing

nvesting is for the long term. There is little return in trying to “time the market” based on trends or the economic outlook. The key element focused on by the savvy investor is value. And the value of an investment vehicle is created over time.  

Think about the various funds you’ve considered investing in and what matters most to you; do you go to the six-month performance or the two-year. Six months will give you a snapshot, but two years will show you historical performance.  

Market Trends 

The savvy investor considers market trends but knows that trends alone are meaningless. The same is true with the economy. While the overall economy took a huge hit in 2020 with unemployment spiking and thousands of businesses permanently shuttered because of the pandemic, the stock market seemed unfazed. The Dow and S&P 500 ended the year at record highs while the NASDAQ had its best return in 11 years.  

While that might seem counterintuitive to most, it’s not unusual for the economy and the markets to trend in opposite directions. What’s more, the opposite is also possible with the economy growing during a bear market. And, as with everything, trying to predict what is going to happen and when is a fool’s errand, making value the most important factor when investing.  

This is not to say that market and economic trends are not important. On the contrary, prudent investors consider them when evaluating investments, but they don’t let the two factors drive the decision. We’ve written before about chasing crowds and jumping on trends and the dangers of both (You can read about it here and here) and this is an extension of those warnings.  

Institutional investors can be a good place to look for insights. When making decisions about what investment moves to make, they will “price in” how they believe the economy will affect the price of a stock. If you keep an eye on what they are doing, you will see that market trends are often a foreshadowing of economic trends. But, because economic and market movements are not correlated, all your investments should begin with value at the core.  

Importance of Value  

When you buy value, you are investing in a vehicle that is financially sound. As with diversification, value reduces the volatility of your portfolio by introducing investments that have an historical track record of stability. Although value investments can lose money, losses will be tempered by the strength of the investments because they are not as prone to the ups and downs of business as higher risk investments.  

Determining the value of an investment varies depending on the type of investment. If you are considering the stock of an individual company, there are a variety of business metrics you can use such as price to earning ration. Investopedia created a list of some of the most popular.  

Mutual funds also come in varying degrees of value, just as individual stocks, and Investopedia has another list to consider when you are evaluating investment options. Here what they have to say in the section called “Selecting what Really Matters”: 

Morningstar has since introduced a new grading system. With the new rating system, the company looks at the fund’s investment strategy, the longevity of its managers, expense ratios, and other relevant factors. 

The number of factors required to conduct a thorough evaluation are many, so take the time you need to identify the best value for your investment dollars.  


While economic trends can have a dramatic effect on movement in the stock market, they do not move in perfect correlation. Very often, as 2021 illustrates, they will move in opposite directions. And because no one can predict the future, although many have tried, it is important to look first to the value of the investments you are considering.  

Ignoring the value while following trends will end badly for you and your portfolio.  


Investing tip: Flexible and Diversified

Keep Your Investments Flexible and Diversified

The fourth installment of our series on 7 Principles of Long-Term Investing is related to the last. In fact, one could look at it as the other side of the Don’t Follow the Crowd coin. However, it is a warning to avoid becoming myopic about your own investments by remaining flexible and diversified.  

Before we dive into the subject at hand, be sure to read, or reread, the first three installments here, here and here. Also, remember that you are in this for the long haul and the total return on your investments is what’s paramount.  


Markets are volatile. And much of the volatility comes from variables beyond anyone’s control. If you have any questions, look at wild swings caused by the pandemic of 2020 and wide variety of actions taken by governments across the globe. No one predicted 2020 and its effects will be felt, potentially, for years to come.  

Smart investors will use 2020 as an opportunity to learn about, or remind themselves, of the importance of keeping their portfolios flexible and diversified.  

We were taught the same lesson when the dotcom bubble burst in the 1990’s. Hundreds of thousands, if not millions of investors lost everything they had because they put everything they had on technology and internet startups. That level of risk is not good if you are 25 and certainly not when you are approaching retirement age.  

Regardless of your age, you should reduce risk in your portfolio by including a variety of quality investments including stocks, bonds, international securities and a few alternative investments if they are supported by your risk tolerance and goals.  


Even the most prudent investor with a highly diversified portfolio faces risks. It’s is the nature of the beast. That is why the second point; flexibility is so important.  

Flexibility should be built into your diversification strategy. There are several ways to diversify your portfolio, but the most common are by industry, by risk tolerance, by country and by investment type.  

When the bubble burst in the 1990’s the magnitude of the losses came on the heels of people leveraging flexibility to move dollars into a single industry. Many did the same in 2020 as pharmaceutical and other healthcare related companies were put in the spotlight because of the COVID pandemic.   

If you diversify correctly, you can still take advantage of the market changes we saw last year and in the 90’s without putting your portfolio at risk. The easiest way is to keep enough cash on hand to take advantage as the investment opportunities present themselves.  


If nothing else, it is important to remember that there is no one type of investment that is always best. Every type of investment, from corporate bonds, to treasuries, to blue chips, to small-cap stocks and so on will have their day in the sun and your portfolio should have enough diversification that some will be up while others are down.  

Remember, investing is a long-term play. You are not in it to make a quick buck and get out.  

chasing the crowd is an investing mistake

Chasing the Crowd is an Investing Mistake

Welcome back to our series on the 7 Principles of Long-term Investing. If you haven’t read the first two, or if you want a refresher, you can find them here and here 

The first principle – focus on the total return of your investment – provides a great foundation for the ones that follow, including today’s; Don’t chase the crowd.  

Be Aware of the Hype 

Why is it you never put complete faith in a weather forecast? Because most of you have enough real-world experience to know that doing so is a fool’s errand. There are too many variables that cannot be controlled, so meteorologists use models – sometimes several – to build a forecast. But, still, forecasts are not perfect, and we are all required to use a little common sense. The same is true for investing. 

Watch any of the financial shows and you’ll see analyst after analyst offering their opinion of the next hot stock. Now for a little secret, if the TV analysts are talking about it there’s a good chance the institutional investors already have it on their radar and are moving money into it to take advantage.  

The same goes for your friends, family, neighbors and coworkers. By the time they are investing in the latest trend, they’re not getting in on the ground floor. They are several stories up and there’s very little room before you hit the ceiling. Put another way, whatever the hot thing is – a stock, security or sector – the price has already been inflated by the hype.  

Remove Emotion 

We aren’t suggesting you ignore the TV analysts or your friends and family, but the hype around their recommendations usually leads to decisions born of emotion rather than reason. And emotion and money do not mix well. Savvy investors seek objective, independent research that uses the best information available, calculated choices and a realistic assessment of risk and determination to avoid making decisions based on purely emotion. As we’ve said in previous posts, investing requires thinking and panning for the long term. Chasing the latest shiny investment object is anything but. This is the reason it is critical to test every decision against the first of our seven principles.  

When faced with the opportunity to chase an investment trend, ask yourself if doing so is putting the total return on your investments in jeopardy. If you answer “no” to that question, follow what the savvy investors do. Research the trend using more than one objective source (3-4 is optimal). Decide what level of risk you are willing to take with your investment dollars. Remember, crowd chasing can lead to lower returns, so you must be willing to sacrifice the potential for higher returns if you invest those same dollars in a different investment vehicle.  


We said it earlier, but it bears repeating, money and emotion do not mix. Unfortunately, that truism can be lost in the crowd when it is rushing to pour investment dollars into the latest hot trend.  

When you see that happening, when your friend and family are telling you about all the money to be made by going along with the crowd, that is when you, the savvy investor, takes a deep breath and recalls the first principle because you know it is better to assess the trend than to join it based on the lure of short-term gains.  

Remove emotion from the equation and buy yourself the time needed for the due diligence necessary so you can make a rational decision based on data, reason and what is best for the long-term health of your portfolio.  

Tax Tips for Those in the Military

The Internal Revenue Service has certain special tax breaks and programs for members of the U.S. Armed Forces. Here are just a few.

Earned Income Tax Credit
If you get nontaxable combat pay, you may choose to include it in your taxable income. Including it may boost your earned income tax credit, meaning you may owe less tax and could get a larger refund. In 2015, the maximum credit for taxpayers was $6,242. The average amount of EITC claimed was more than $2,400. You may want to consider running both calculations to see what choice best benefits you.

Signing Joint Returns
As a rule, both spouses normally must sign a joint income tax return. If your spouse is absent due to military duty, you may be able to sign for your spouse. Keep in mind, however, that you may need a power of attorney to file a joint return.

Job Search
If you leave the military and look for work, you may be able to deduct some job search expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees.
* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS[9]

[9], January 8, 2021

Markets Start 2021 on a High – WEEKLY UPDATE – JANUARY 11, 2021

The Week on Wall Street
Shrugging off COVID-19 infections and the disruption at the Capitol on January 6, stocks powered higher to kick off a new year of trading.
The Dow Jones Industrial Average gained 1.61%, while the Standard & Poor’s 500 increased by 1.83%. The Nasdaq Composite index, which led throughout 2020, picked up 2.43%. The MSCI EAFE index, which tracks developed overseas stock markets, rose 1.45%.[1][2][3]

Fireworks to Start the New Year
Stocks got off to an inauspicious start amid the stuttering pace of vaccine distribution and concern that the economic recovery might take longer than anticipated. Uncertainty over the looming Senate runoff election in Georgia added to the broad retreat that marked the first day of 2021 trading.
From there markets turned higher, aided by firming oil prices with subsequent support provided by the Georgia Senate election results, which lifted hopes of additional fiscal stimulus. Stocks managed through political unrest mid-week, with banks, economically sensitive stocks, and technology shares leading the way.
The yield on the 10-year Treasury rose above 1% for the first time since March as investors fled bonds in anticipation of new federal borrowing.[4]
Stocks touched all-time highs on the final trading day, capping a strong week of performance.[5]

Employment Picture
The U.S. economy lost 140,000 jobs in December, confirming fears of economic slowdown brought on by a resurgence of COVID-19 infections.
Not surprisingly, it was restaurants and bars that saw the greatest job losses, with the larger hospitality sector accounting for nearly all the job losses last month. Meanwhile, November job creation was revised upward, from 245,000 to 336,000.[6]
To help put the pandemic in perspective, December’s job report capped the worst year for job losses since the tracking began in 1939. The unemployment rate remained unchanged at 6.7%.[7]

[1] The Wall Street Journal, January 8, 2021
[2] The Wall Street Journal, January 8, 2021
[3] The Wall Street Journal, January 8, 2021
[4] The Wall Street Journal, January 6, 2021
[5] CNBC, January 8, 2021
[6] The Wall Street Journal, January 8, 2021
[7] The Wall Street Journal, January 8, 2021

Tax Tips – Tax Benefit and Credits: FAQs for Retirees

Lots of questions can come up about income taxes after one has retired. Listed are answers to just a few common questions from retired taxpayers.

What types of income are taxable?
Some common types of taxable income include military retirement pay, all or part of pensions and annuities, all or part of individual retirement accounts (IRA), unemployment compensation, gambling income, bonuses and awards for outstanding work, and alimony or prizes.

What types of income are non-taxable?
A few examples of non-taxable income are veteran’s benefits, disability pay for certain military or government-related incidents, worker’s compensation, and cash rebates from a dealer or manufacturer of an item you purchased.

Why is my pension taxed?
It depends on how the money was put into the pension plan. For example, if all the money were contributed by the employer or the money was not taxed before going into the plan, it would be taxable. When your contribution is from already-taxed dollars, that portion of the pension is not taxed, but must be recovered over your life expectancy.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS[21]


[21], January 1, 2021

The Year in Review – WEEKLY UPDATE – JANUARY 4, 2021

The Week on Wall Street

Stocks moved higher during a holiday-shortened week of trading, capping off a turbulent, but otherwise strong year for equity investors.

The Dow Jones Industrial Average gained 1.35%, while the Standard & Poor’s 500 increased by 1.43%. The Nasdaq Composite index, which led all year, added 0.65%. The MSCI EAFE index, which tracks developed overseas stock markets, rose 2.02%.[1][2][3]

The Year in Brief

The global pandemic disrupted economies, financial markets, and daily life in 2020. Households and businesses were put to the test during the toughest and grimmest years in decades. The winter brought a resolution to the U.S.-China tariff dispute, the Brexit referendum, and the first U.S. appearance of the novel coronavirus. As spring started, abrupt stay-at-home orders in response to COVID-19 curtailed business activity, which dampened consumer spending. The federal government responded, arranging stimulus payments for millions of Americans.

Wall Street bounced back from its March downturn, but the economy limped along. The pandemic entered its worst phase in fall, but two highly promising vaccines were announced in November, and as winter started, they began to roll out to the public. On the cusp of 2021, Congress approved a second national economic stimulus, and the European Union and United Kingdom signed off on a post-Brexit trade deal.

There are many unanswered questions as we enter 2021. Will mass vaccination happen as quickly as we anticipate? Will a successful vaccination program lead to more hiring, more travel, more in-store shopping, and more confidence? The financial markets will be watching progress on this effort.

The U.S. Economy
The pandemic sent the U.S. economy into an abnormal phase, and so our fundamental economic indicators displayed atypical readings.

The Department of Labor’s main jobless rate, 3.5% in February, hit 14.7% by April. Headline unemployment declined for the next seven months, to 6.7% by November. The U-6 unemployment rate, measuring unemployment and underemployment, peaked at 22.8% in April.[4][5]

As people stayed home, consumer spending trended lower, falling 6.9% in March and 12.6% in April.[6]

The federal government moved to boost economic activity. As March ended, a $2 trillion economic stimulus bill became law, featuring cash payments to households, temporary increases in federal unemployment benefits, and a Small Business Administration program pledging to offer distressed companies funds equivalent to 8 weeks of payroll costs. The aid began rolling out in April, and in May, the White House unveiled Operation Warp Speed, a public-private partnership intended to produce COVID-19 vaccines in record time. Two vaccines were approved by the Food and Drug Administration by fall.[7][8]

The Federal Reserve took the benchmark federal funds interest rate down to a target range of 0-0.25%, and revived emergency loan programs first introduced in 2008. It collaborated with the Department of the Treasury on efforts to buy corporate bonds and encourage business loans. In a monetary policy shift, the central bank said in August that it would accept average inflation of 2% for the near term, and was willing to tolerate a little more inflation in the economy while pursuing the goal of full employment.[9][10]

As stay-at-home orders lifted, the economy rebounded. Gross domestic product, which the Bureau of Economic Analysis said had contracted 31.4% in the second quarter, grew 33.4% in Q3. The BEA also recorded a 41.0% Q3 climb for consumer spending. Stay-at-home orders returned in Q4, however, prompting another federal economic stimulus in December.[11]

The housing market stayed strong. By November, existing home sales were up 25.8% year-over-year, according to the National Association of Realtors; Census Bureau data showed a 20.8% annualized improvement for new home buying.[12][13]

The U.S.-China tariff dispute eased throughout the year. In the January 2020 trade talks, the U.S. promised to lessen import taxes on Chinese goods, and China agreed to buy more American exports.[14]

The Global Economy

The International Monetary Fund expects the world economy will contract 4.4% in 2020. If that estimate holds, 2020 will be the worst year for global growth since the 1930s.  The U.S. economy shrank 4.3% in 2020, according to the IMF’s forecast. That is better than the 8.3% setback estimated for the eurozone. The IMF projects that China’s economy grew 1.9% last year. As for 2021, it sees GDP advances of 8.2% for China, 5.2% for the eurozone, and 3.1% for the U.S.[15][16]

The European Union and United Kingdom agreed to a post-Brexit trade deal on December 24. This completed the Brexit process, which began with the 2016 leave vote and included the U.K.’s formal exit from the E.U. last January. Businesses and financial firms based in the U.K. now face new trade rules and costs, even with the new pact in place.[17]

Looking at stock benchmarks around the world, there were more ups than downs. South Korea’s Kospi Composite stood out with a 30.75% 2020 gain. Argentina’s MERVAL climbed 22.93%, Taiwan’s TWII 22.80%. Two other notable 2020 advances: Japan’s Nikkei 225 added 16.01%, and China’s Shanghai Composite rose 13.87%. There were also notable retreats: Indonesia’s IDX Composite lost 5.09%, France’s CAC 40 7.14%, Russia’s RTS 10.42%, and Spain’s IBEX 15.45%. The MSCI EAFE index, a broad benchmark tracking developed-economy stock market performance in Europe and Asia, rose 5.43%.[18][19]

Final Thoughts

We join all Americans in happily drawing the curtain on 2020. Though it was a challenging and tragic year for so many, there are good reasons to believe that 2021 will be a year of progress in returning to our pre-pandemic normal. We wish you and your family a healthy and happy new year!


[1] The Wall Street Journal, December 31, 2020

[2] The Wall Street Journal, December 31, 2020

[3] The Wall Street Journal, December 31, 2020

[4] Trading Economics, January 2, 2021

[5] CNN Business, May 8, 2020

[6], January 2, 2021

[7] Los Angeles Times, December 18, 2020

[8], January 2, 2021

[9] New York Times, December 23, 2020

[10] Reuters, August 27, 2020

[11] The Balance, December 27, 2020

[12] Reuters, December 22, 2020

[13] Census Bureau, December 23, 2020

[14] NPR, January 15, 2020

[15] Seattle Post-Intelligencer, December 31, 2020

[16] CNN Business, October 13, 2020

[17] The Week U.K., December 23, 2020

[18], December 31, 2020

[19] Wall Street Journal, January 1, 2021

Vaccine Rollout Spurs Markets – WEEKLY UPDATE – DECEMBER 21, 2020

The Week on Wall Street

Stocks climbed higher amid the COVID-19 vaccine rollout and an improving outlook for a fiscal stimulus bill.

The Dow Jones Industrial Average, which has lagged all year, gained 0.44%. The Standard & Poor’s 500 picked up 1.25% while the Nasdaq Composite index surged 3.05%. The MSCI EAFE index, which tracks developed overseas stock markets, rose 2.44%.[1][2][3]

Stocks Climb Higher

In a week that celebrated the national rollout of a COVID-19 vaccine, market enthusiasm was tempered by worries of infection caseload and fresh economic lockdowns.

Investors turned their focus to the fiscal stimulus negotiations in Washington, D.C., with the hope that a relief bill may be the bridge that gets the economy over its near-term troubles until vaccine distribution grows more widespread.

These negotiations were not smooth sailing. When a compromise bill appeared to gather support, markets quickly moved higher, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all setting new record high closes on Thursday.[4]

Stocks slipped in the final day of trading as stimulus hopes wavered.

Fed Outlook on Economy Improves

The Federal Reserve on Wednesday concluded its last meeting of the Federal Open Market Committee for 2020. Fed officials provided more detail for its monthly bond purchase program and reiterated their commitment to a monthly purchase of $120 billion of Treasury and mortgage-back securities until its inflation and employment goals are met.[5]

The Federal Reserve also raised its outlook on the U.S. economy. It revised its September forecast of a 3.7% decline in GDP in 2020 to a 2.4% decline, and increased its 2021 GDP growth forecast from 4.0% to 4.2%. It also expects unemployment at 2020 year-end would fall to 6.7%, substantially lower than its earlier estimate of 7.6%.[6]

Final Thoughts

Our weekly market commentary will not be published next week. We would like to take this moment to wish you and your family a safe and joyous holiday season.

[1] The Wall Street Journal, December 18, 2020

[2] The Wall Street Journal, December 18, 2020

[3] The Wall Street Journal, December 18, 2020

[4] CNBC, December 17, 2020

[5] The Wall Street Journal, December 16, 2020

[6], December 16, 2020

Tax Tips – Year-End Tax Tips

2020 is almost over, which means it’s time to start wrapping up those taxes for the year! There are lots of things to do to prepare for 2021. Here are some year-end tax tips to consider:

  • If you think you will be in the same or a lower tax bracket next year, it may be beneficial to defer income until 2021. This could include self-employment income or year-end bonuses.
  • You may be able to take some last-minute tax deductions, such as controlling when you contribute to charity.

The end of the year is the perfect time to talk with your tax professional on how to position yourself for 2021.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from Turbo Tax[8]  


[8], December 11, 2020