Understanding Investment Risk and When to Make Adjustments

Managing investment risk is one of the most critical elements of building and maintaining long-term wealth. At Canty Financial, we don’t see risk as something to avoid entirely; rather, we view it as a factor to balance based on your financial goals, time horizon, and comfort level. This article explains how we approach investment risk and when adjustments to your portfolio might be warranted.

Our Philosophy on Risk Management

At Canty Financial, we believe that risk should be managed thoughtfully and consistently across all portfolio models. Whether your portfolio is aggressive, semi-aggressive, moderate, conservative, or preservation-focused, the principles of risk management remain the same. Each model is carefully constructed to align with your personal goals while maintaining a level of diversification that helps reduce unnecessary risk.

When to Adjust Risk?
We recommend adjusting portfolio risk only when there are significant changes in three key factors:

1. Time Horizon: Are you nearing retirement or a major financial milestone?
2. Goals for the Money: Have your financial objectives shifted?
3. Risk Tolerance: Has your comfort with market fluctuations evolved?

Changes to these factors might call for a reassessment of your portfolio, but adjustments should not be driven by short-term market movements.

The Role of Diversification

Diversification is the cornerstone of all our investment strategies. It reduces risk by spreading investments across:

• Sectors: Balancing exposure to industries like technology, financial services, healthcare, and energy ensures no single sector dominates your portfolio.
• Regions: Allocating assets globally, including U.S., international developed, and emerging markets, provides protection against geographic-specific risks.
• Bond Duration: Incorporating short, intermediate, and long-term bonds balances income potential and interest rate sensitivity.
• Credit Risk: Mixing high-quality and selective higher-yield bonds optimizes income generation while managing overall portfolio risk.

This approach allows each portfolio to withstand market volatility and perform well under varying economic conditions.

When NOT to Change Risk

During periods of market volatility, it can be tempting to reduce risk to avoid losses. Similarly, some investors may feel the urge to increase risk during market rallies. However, making changes in response to short-term market conditions can often lead to poor outcomes:

• Reducing Risk During a Decline: Selling during market downturns locks in losses and eliminates the opportunity to benefit from future recoveries.
• Increasing Risk in a Rally: Buying aggressively during market highs increases exposure at inflated prices, often leading to suboptimal returns.

Our approach ensures that portfolio risk aligns with your long-term plan, not short-term emotions or market trends.

Diversification in Action: A Practical Example

Let’s take a diversified portfolio as an example. Imagine a Moderate portfolio with 60% equities and 40% fixed income. This allocation supports growth through exposure to high-quality U.S. equities, global markets, and emerging economies, while investment-grade bonds provide stability and income.

• In a Market Rally: Equities drive strong returns while fixed income remains a cushion against future volatility.
• During a Slowdown: Diversified exposure to international markets and high-quality bonds mitigates the impact of U.S. market underperformance.
• In a Recession: Fixed income plays a stabilizing role, preserving capital and providing income when equities decline.

This strategic mix demonstrates how our portfolios are designed to adapt to various economic scenarios without requiring dramatic shifts in risk.

Your Partner in Risk Management

As a fiduciary advisor, our role is to manage risk responsibly and consistently, ensuring that your portfolio remains aligned with your goals. By emphasizing diversification and taking a disciplined approach, we help you navigate market uncertainties while pursuing growth opportunities.

If you’re considering changes to your financial plan or portfolio, let’s talk. Together, we can ensure your investments remain aligned with your long-term vision while managing risk effectively.

Understanding and managing risk is central to achieving your financial goals. By focusing on what you can control and avoiding reactive decisions, you’ll stay on track for long-term success. At Canty Financial, we’re here to guide you every step of the way.

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor