Risk Management Strategies for a Summer Investment Tune-Up
By Paul K. Doak, CFP
It’s summer! Time for sunshine, vacations, and perhaps a refreshing dip in the pool. But while you’re unwinding, don’t let your investment portfolio get too comfortable. Summer is a great time to pause for a moment, assess your portfolio, and confirm your risk management strategies are as robust as your vacation plans.
Because let’s face it, nobody wants a financial sunburn.
How to Reassess Your Risk Tolerance (It’s Not a Static Number!)
Think of risk tolerance like your preferred spice level. Some people crave fiery habaneros, while others prefer the mild comfort of a bell pepper. But here’s the kicker: your spice level can change!
Life events are game-changers: Did you just welcome a new baby? Buy a house? Getting close to retirement? These major life events often mean your ability to withstand market swings (and thus your risk tolerance) has shifted. A new mortgage might mean you need less volatility, while an unexpected inheritance could free you up to take a little more calculated risk.
Market swings offer clues: How did you really feel during the last market dip? Were you calmly rebalancing, or were you checking your portfolio every five minutes with a knot in your stomach? Your emotional reaction to volatility is a huge indicator of your true risk tolerance, more so than any questionnaire.
Future needs vs. present comfort: Are your financial goals still aligned with your current risk level? If you’re planning a major purchase soon, perhaps dial back on risky assets. If retirement is still decades away, you might have more room for aggressive growth.
Don’t just fill out a questionnaire once and forget about it. Regularly check in with your gut, your life circumstances, and your financial goals.
Diversification: What It Really Means and Why It Matters
“Diversification” sounds like a fancy finance word, but it’s really just a smart investing strategy, the equivalent of not “putting all your eggs in one basket.”
Beyond just different stocks: Many people think owning 20 different tech stocks means they’re diversified. Not quite. True diversification means spreading your investments across different asset classes (stocks, bonds, real estate, commodities), different industries, different geographies, and even different company sizes. If all your “different” stocks behave the same way in a market downturn, you’re not truly diversified.
The power of non-correlation: The magic of diversification lies in non-correlation. This means when one part of your portfolio zigs, another part zags (or at least doesn’t plummet at the exact same time). Bonds, for instance, often perform differently than stocks, offering a potential cushion during equity market downturns.
Why it matters: smoothing the ride: True diversification allows you to optimize returns over the long term while mitigating big, scary drops. It helps smooth out the bumps in your investment journey, making it less stressful and more sustainable. Think of it like shock absorbers for your portfolio.
The Biggest Investing Mistakes to Avoid in Volatile Markets
Summer can sometimes bring hotter markets or unexpected storms. Here are the investment blunders to sidestep when things get choppy:
Panic selling: This is the absolute worst. When markets drop, selling off your holdings means locking in losses and missing out on the inevitable recovery. Remember the old saying, “Time in the market beats timing the market.” Stick to your long-term plan.
Chasing hot trends: That “can’t-lose” stock or sector everyone’s buzzing about? Often, by the time it hits mainstream news, the big gains have already been made. Stick to your investment strategy and avoid FOMO (fear of missing out).
Ignoring your rebalance: Your asset allocation (how much you have in stocks vs. bonds, etc.) can drift over time due to market performance. If stocks have had a great run, they might now represent a larger portion of your portfolio than you intended, increasing your risk. A mid-year tune-up is perfect for rebalancing—selling a little of what’s performed well and buying a little of what’s lagged to bring your portfolio back to your target allocation. This is a classic risk management strategy!
Putting all your eggs in one basket (again): We know diversification is key, but it’s easy to forget when a specific sector is soaring. Don’t let profits in one area tempt you into overconcentration.
Neglecting your emergency fund: Especially in uncertain times, a robust emergency fund (3-6 months of living expenses, or more) is your first line of defense. It prevents you from having to sell investments at a loss if an unexpected expense arises.
Get Started on Your Summer Risk Management Strategies!
As you enjoy your summer, carve out a little time for your investment portfolio. A small tune-up now, focusing on risk management strategies, diversification, and avoiding common mistakes, can lead to a much smoother, more confident ride toward your ideal financial future.
At I.D. Financial, our top priority is confirming your money works for you and your goals. Ready to get started? We invite you to call (206) 774-0262, email paul@id-financial.com, or schedule online.
Happy investing, and happy summer!
About Paul
Paul Doak, CFP®, is the founder of I.D. Financial, a financial planning firm based in Bothell, Washington. He provides goals-based wealth planning and tax reduction strategies designed to align with each client’s unique life plans. With over 25 years of financial services experience, Paul is dedicated to simplifying complex financial matters and helping clients navigate life’s transitions with clarity and confidence. His approach begins with listening; as a sounding board for each client’s concerns and goals, he creates personalized strategies that reduce stress and allow them to focus on what matters most. Known for his responsive and educational style, Paul provides a judgment-free zone, focusing on the future rather than dwelling on past financial decisions.
A CERTIFIED FINANCIAL PLANNER® professional and Life Underwriter Training Council Fellow, Paul holds a bachelor’s degree in political science and economics from the University of Southern Maine. Based in Bothell, Washington, with his wife and son, outside of work, he enjoys skiing, reading, woodworking, traveling, fishing and camping with his son, and helping his son with Scouting. To learn more about Paul, connect with him on LinkedIn.