Worried About Your 401(k) & Other Investments? Understanding Systemic Risk Can Help

Are your investments aligned with your risk tolerance? Learn more about systemic risk and how it might change your behavior as an investor from Leisl L. Cording, CFP®, CDFA®. 

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Transcript

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Welcome to You And Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Leisl Cording, senior vice president and financial advisor at Weiss, Hale and Zahansky Strategic Wealth Advisors. Now on to today's topic. This phrase systemic risk, two words I don't often use in a sentence together, and I think a lot of people don't know what that means. So let's begin by understanding what systemic risk really means. Shed some light on that term and its implications. Of course. So systemic risk, it's also known as market risk and a risk that impacts the entire market as a whole. So it's not just a single stocker in this or industry that's impacted by this. And I'll just give you some examples. We were just talking about it, but this would include a rising inflation, rising interest rates, war, terrorism. These are things that happen in the world that we really we don't have control over. And that's why it impacts all investors. And it's something that we can't we can't necessarily control. But there are some things we can do. And we'll discuss those this morning. How does systemic risk impact individual investors and what lessons can they learn from it? Yeah, well, and I mentioned you can't completely protect yourself from systemic risk, but you can take some steps to help mitigate that. And one key lesson when we talk about systemic risk is really spreading investments across multiple asset classes and just having a variety of different types of investments in your overall portfolio. And that's something that every advisor stresses. But if you think about it, we've had an increase in interest rates over the last year, the steepest increase actually, for that matter. And so things like that, when we have interest rates that are increasing. There are some bonds that may be more valuable than the ones that were already issued beforehand. So if we have a diversified portfolio that helps to mitigate that risk while interest rates cause some stocks to actually decrease in value. And so we've seen this over the last year, stocks are not performing that well, but we're seeing shorter term bonds, CDs, Treasuries that have been picking up more interest because of the higher rates that you had in your portfolio. So if you have if you're offsetting that, that risk there, that's one way to help mitigate. And and like I said, you can't completely mitigated by diversifying, but you can still spread across different investments and asset classes and choosing the right mix of investments and matching that to your individual risk tolerance. It will really help you to build a portfolio and a financial plan that will be successful for you. So and that's when you talk to your advisor about this risk stock. And remind me again what is risk tolerance? Yeah. Good question. So risk tolerance is how much a person has a comfort with taking on risk or potentially losing money in their investments. And so sometimes you might hear this referred to as the sleep factor and so basically we ask it, would you be able to sleep if you lost money in your investments, If you might be kept up at night, then you probably have a low risk tolerance, which means you should be leaning towards less risky investments that provide more of a like fixed income or bonds that sort of provide that. But income, that's consistent. But if you can't sleep and you're okay with losing some money, you have a longer time horizon, then you can probably take on more risk and have more stocks in your portfolio, for example. Is there a relationship between systemic risk and risk tolerance? There is in some way. So systemic risk, again, is really that market risk, whereas risk mark at risk. So things we can't control, whereas risk tolerance is something that you, you sort of can control because you can align it to your financial plan and it has to do with and we'll talk about this a bit later your time horizon where if you can take on a bit more risk, then your your risk tolerance or your your ability to be okay with investments, losing money because you have a longer time horizon is really what matters when you when you talk about that. So they're they're sort of similar but slightly different. So obviously understanding risk tolerance. Leisel And tempering that with diversification is crucial. How do the current market conditions and overall systemic risk play into how investors can determine the right level of risk for their portfolios? Well, know, that's something that we work on with our our clients to determine that right level of risk for them. And just to give you an example, so you have an idea of how we we think about it, but then we also work with them to have them answer some questions that help us to gauge their risk tolerance. But if you're a young professional and you have decades to go before retirement and you're saving enough for one case, you probably have a lot more stocks in there than somebody who's only a few days or a few years away from retirement. And that's because you have a lot more time down 20%. That's probably not going to help you buy buy a house in that short timeframe. Whereas if you had that money in a CD and it was earning 4 to 5%, then you're in a much better financial position. So again, that's why a time horizon is also very important. But over time, it's likely that that stocks would outperform. And typically we say investing beyond three years to five years is sort of that sweet spot for for investing in stocks. Anything before that, you might want to consider some kind of cash or more fixed income. You know, that instrument where you're you're getting that potentially, you know, more not guaranteed, but more likely that you're going to get that return. Obviously, the economy has changed a lot in the last three years. And a year ago, we were wearing masks, the frozen food aisle. Do you find a change in people's investment decisions in the last year, investing in different things now than they were a year ago when there was still the fear of the pandemic? Yeah, well, and that's where it comes back to a diversified portfolio and having all the different asset classes, which we had touched on briefly in the beginning of the segment. But if I dig a little deeper on that and just having a more balanced, diversified portfolio across the entire portfolio. So growth stocks have performed very well over the last three years. During the pandemic last year, they didn't perform as well, but they've made a recovery on some of that loss. So it really it's changed certainly. And there's been and this happens every year, regardless of what's going on in the markets, there will be some that perform well and some that don't perform as well. So like I said, growth stocks have performed very well. Value stocks have performed pretty well. We've seen some small and mid-cap companies or smaller companies and sort of those mid range companies have performed pretty well, but not as well as larger companies. So that's why having a diversified portfolio is key and and evolves over time. And that's where we make those decisions in our investment committee as to which where we should tilt based on what markets are doing plays well. Inquiring minds want to know what's the first thing you do as far as the markets, as far as investing. When you get up in the morning, maybe you're checking your phone while you're having your rice crispies or what's the first thing you do when you come in the office? I'm guessing you're analyzing world events and things like that. But I'm just kind of curious what the first things you check out every day are. Yes. So exactly. We look at the Wall Street Journal. Typically any we have a blog that we follow where we're getting some and I had talked about them a bit in the beginning, fundamentals of the economy. So every week we're getting and we're seeing what, you know, how things are going, how our consumers are feeling, what our business is doing, what's inflation doing. So we get those figures on a a weekly basis to give us updates. And then just sprinkled in with news from The Wall Street Journal or other other publications that help us to to understand what's going on in the markets and and that helps to drive our decisions. So along that same line, keeping tabs on world events and understanding how that plays into systemic risk seems like a lot of work. How does Weiss Hayles the hands keep up with it, and how can the average investor, how can I keep up? Yeah, well, there's a lot to do analyzed over over time. And that's why picking some good news publications that can help to just distill what's really important. And I think and that's why we always say there's headline risk that goes into some of the reasons why the markets are performing the way they are. Because when you look at underlying fundamentals like we do, you can see that things like employment history, inflation figures, consumer spending are actually have actually been pretty good over the last several months. And that helps to give us indications on where the economy might be headed and that helps to shape the investment decisions that we make. And we do we have we don't make changes frequently, but we do have a quarterly investment meeting where we review performance of our investments and then we also make decisions on forward looking analysis and historical performance figures. So that's that's really important as an individual investor, understanding the economy as a whole. And like I said, not focusing too much on headlines and going back to our what our segments about systemic risk, it's something that we should all be aware of. And but just knowing that it's important to have a mix of different asset classes within your overall portfolio. So stocks, bonds and then distilling that down further to having larger companies, smaller mid-cap companies because each of those different pockets of the economy are going to do well depending on what's going on in the market. So the lots to keep up with and we've mentioned this before, but working with a financial advisor, keeping tabs on everything and acting and clients best interests is really what what our goal is to help minimize risk and maximize return. So we really emphasize a detailed evaluation of of goals for every client. And this is getting back to that, looking at risk tolerance, time horizon, all of the factors that lead into building that financial plan for our client and going through our plan while invest will live well process. So that's what allows us to create that tailored financial plan. Our primary topic today is systemic risk, and you talked about your quarterly investment meetings. I'm assuming at some point during those periodic meetings, the phrase systemic risk is addressed. That's exactly right. And it's one of those things I mean, it sort of is an overarching theme to two things that we focus on. And then we look at the individual factors that lead into that inflation, interest rates, They weren't where is all all of this headed and how are we going to mitigate that across our portfolio? So it's definitely a topic that's at the top of our our minds that each investment committee. In our lives will the average guy on the street and I'm raising my hand, I'm an average guy on the street or the average gal on the street, they hear this talk about the market doing really well, the stuff you talked about a little while ago today, and then they go on the market and they see the price of eggs and they see the price of food. They go into the department store and they see the price of stuff that just keeps going up. Is there a way this can get back in control because the prices are higher now, even though the markets are doing great? Yeah, that is something that the Federal Reserve is trying to work on by raising rates or tightening, you know, that monetary policy, they're able to help curb spending. So what they're trying to do is to have consumers spend less and then eventually that should lower the demand and then that would help to lower to lower prices on things. So eventually it'll it should get better. We're still sort of on the higher end of inflation that that we'd like and where we'd like to be. And that's why I think and why we think that the the next couple of of months will probably see some more rate increases that will help with that, um, with those prices that you're seeing. So it's sort of it takes some time to move through the economy. And I know you wish that the price of eggs or bacon or whatever it is that you're buying would go down faster. But it does take some time to sort of move through the the economy as a whole. That brings us to the end of this episode. As always, thanks for listening to you And Your Money. Find even more episodes, videos and other resources at our website, whzwealthcom. Be sure to come back next week for more tips to help you live fearlesly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRA/SIPC, a registered investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strives to support clients in achieving their financial life goals. For more information regarding wealth management and customize financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit www.whzwealth.com.