Being Too Conservative

WHAT A RIDE 2025 HAS BEEN, HUH? UGH.

Markets are back to relative normal...although there are still bumps along the way, which again IS normal. Volatility is a part of the deal when investing. When you look over the long-term, however, markets tend to move upwards.

With that said, this past year has been a great test of an individual’s risk tolerance. When you first set up an investment account, you may be asked about your risk tolerance, which impacts how your account is invested. Your risk tolerance is generally based on three things:

1. RISK CAPACITY: how much risk you can take given your current situation and the goals you’ve identified

2. RISK PROPENSITY: how much risk you are comfortable with

3. RISK RECOGNITION: how much risk you think there is

Last year, when the markets were up double digits, everyone's risk propensity was probably pretty high.....it’s easy to be enthusiastic about taking risk when stocks are doing well. Your risk tolerance may change over time. What you are comfortable with today from a risk perspective, is probably less than what it was last year, but more than it was in March.

Also, not a lot of people factor in risk capacity. Just because you may be comfortable with your investments dropping 25% doesn’t mean that you are able to take on that much risk. For example, you may need money in the short term (6 to 12 months from now) and may not have the time to recover from a down market.

It is perfectly okay to be conservative in your investing. We want people to be able to sleep at night. Those more conservative in their investing may see smaller returns and need to adjust their spending needs or save more.

Experiencing a market drop and imagining a market drop are two different things. If you experienced panic in March/April when your account values likely dropped, then you may want to change your risk tolerance. Now, when the markets are getting back to their highs, it could be a good time to make risk tolerance changes. This is something you can discuss with your financial advisor.

In the meantime, I recommend that you build up cash in your emergency savings and keep it liquid (easily accessible). If you have enough cash, you can weather investment “storms” and worry less about touching your portfolio until it recovers.

Speaking of storms, I have had several people ask me if they should get out of the market and go to cash until this “bad market” is over.

My question to them is, “How will you know when it’s over?”

It is tempting to want to reduce risk and have your money in cash, especially now, when the markets are “back to normal” and your investment/retirement account values are likely close to where they were at the start of the year. That is just human. We are prone to emotions, and it feels uncomfortable when our investments go down.

We can soothe ourselves during emotional times with some historical data. Granted, past performance is no guarantee of future results. The markets have proven that no matter what they throw at us, there are always new ways to freak us out. That said, if you get out of the market entirely, especially at market lows, you can negatively impact your returns.

I am not talking about diversification. Diversification is the answer to largely everything, folks. BUT, if you say “hard pass” to stocks entirely, then you may need to be prepared to cut your returns. This chart shows what happens if you miss the 10 best days of the market over a 20-year period. 20 Years! You may want to get out when the market is down, but often the best up market day is preceded shortly by a big down day.

If you were invested in the S&P 500 Index for this entire 20-year period (2005-2024), you would have made a 10.4% average annual return. But if you missed only 10 of the best days during this 20-year period, then your return would be cut nearly in half. The truth is that nobody knows when the best days are going to be. So, if you are thinking, I’m just going to go to cash for a little bit, watch, and then get back in, not only do you have to make two correct decisions (when to get out and when to get back in), you may also significantly reduce your return. A better alternative might be to rebalance your portfolio to be more conservative/less risky or more diversified.

Before you make any changes to your investments, like going to cash, it’s always a great idea to run it by a professional. Let an advisor keep you from acting on emotions and, instead, direct you towards trends and industry experience. As always, discuss your risk tolerance with your advisor, or if you don’t have one, call me!

Jill is a passionate Senior Wealth Advisor, continually striving to find new ways to exceed her clients' expectations with her depth of knowledge in taxes, estate planning, and personal finance. She seeks to empower her clients to increase their own financial literacy and understanding of wealth management. She’s especially interested in helping younger clients and older single women who may need help with their finances.

Source: J.P. Morgan Asset Management using data from Bloomberg. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations are shown gross of fees. If fees were included, returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data as of December 31, 2024.

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