Markets don’t move in a straight line. Volatility is a normal, recurring part of investing — not a sign that something has gone wrong. The real question for any investor isn’t whether a downturn will happen, but whether their plan was built to handle one when it does. That’s the meaning behind risk management, and it’s a concept worth understanding regardless of where you are in your investing journey.
Defining and Understanding Risk
Risk is an unavoidable part of investing. Every asset that offers the potential for growth also carries the potential for loss, and, unfortunately, there’s no way to eliminate that trade-off. As investors, the best we can do is manage it thoughtfully, which looks different for everyone.
Risk tolerance isn’t a fixed number. It’s shaped by where you are in your investment journey, your financial goals, and how you personally respond to uncertainty. For example, a 30-year-old with decades until retirement might have a portfolio weighted more toward stocks. While a stock-heavy portfolio may offer the potential for higher returns, it will also entail greater volatility. A younger investor has plenty of time in the market to recoup any losses during a downturn, which is why they often have a higher level of risk tolerance.
On the other hand, someone approaching or already in retirement is typically in a different position. With a shorter runway and a growing reliance on their portfolio for income, the priority often shifts from maximizing growth to preserving gains already achieved. This is also when a portfolio typically holds more bonds and other lower-volatility assets — not because growth no longer matters, but because protecting against a poorly timed downturn matters more.
Neither approach is “right” in isolation. The right level of risk is the one that aligns with your goals, your timeline, and your ability to stay the course when markets get uncomfortable.
How to Manage Risk Effectively
Risk management starts with asset allocation. A well-constructed allocation reflects your goals, tolerance for volatility, and it’s designed to evolve as your life does.
At Legacy Private Wealth Partners, our financial planning process always begins with a discussion of our client’s goals. Those goals might be long-term (saving for a child’s education or building enough wealth for retirement), or they could be more immediate (purchasing a new home or funding an upcoming vacation). Based on these discussions, we gain an understanding of our clients’ risk tolerance and can build a diversified portfolio in which risk is baked in from the start.
One of the most common mistakes investors make is assuming that once they’ve built their portfolio, the process is finished. The reality is that even well-built portfolios can drift from their original target. If certain stocks perform better than other parts of the portfolio, over time the portfolio can become more weighted toward equities — and assume higher risk as a result. This phenomenon is called “portfolio drift,” and it’s why periodic check-ins are essential to make sure that your portfolio hasn’t deviated from its original strategy. These check-ins can also be an opportunity to reevaluate your goals and ensure your risk tolerance hasn’t changed.
Why Risk Management Matters
Ultimately, risk management isn’t about avoiding losses altogether. Instead, it’s about making sure a temporary decline doesn’t derail a lifetime of planning. The biggest mistake any investor can make is deviating from their financial plan and fear-selling assets during a market decline. Why? Because exiting the market leaves you vulnerable to missing the rebound.
Missing those days can have a major impact on a portfolio. According to research from Wells Fargo, an investor who missed the market’s 30 best days over the past 30 years would have seen their average annual S&P 500 return drop from 8.4% to 2.1% — below the rate of inflation.
At Legacy, one of the tools we use to help our clients understand their future through different market scenarios is a Monte Carlo simulation. This tool stress tests your portfolio and asset allocation against a wide range of market paths. In other words, it allows you to see how your risk management strategies play out, even in the worst-case hypothetical scenarios. Investors who understand that their long-term goals are likely to remain intact, even in cases where the market drops, are less likely to panic and sell assets during a short-term decline.
Risk management isn’t about building a portfolio that never declines. It’s about building a plan that anticipates uncertainty, so when markets move, you have the confidence to stay invested and focused on what comes next.
Get in touch with a member of our team at Legacy Private Wealth Partners today to see if your portfolio is set up to manage risk according to your own tolerance.
The information provided here is for general informational purposes only and does not constitute tax advice. Readers should consult a qualified tax professional for guidance specific to their individual circumstances.
Advisory Services offered through Concurrent Investment Advisors, LLC, an SEC Registered Investment Advisor. Brokerage services offered through Purshe Kaplan Sterling Investments (PKS), Member FINRA/SIPC, Headquartered at 80 State Street, Albany, NY 12207. PKS and Concurrent Investment Advisors, LLC d/b/a Legacy Private Wealth Partners are not affiliated companies.
