Buckle Up, Buttercup!

Volatility & Risk Tolerance

At OLV Investment Group, we had the pleasure of hiring an international intern who is attending the University of Michigan. Muhammad Ammar is hardworking and eager to learn. In fact, when asked during his first week if he was willing to work an unscheduled, 13-hour day, he jumped at the opportunity. This long day included an hour drive to our Livonia office where we held a seminar regarding risk tolerance and the tools we utilize when to determine how much risk a client is comfortable with.

During the 60-minute trip to Livonia, I may have accidentally driven significantly above the speed limit. Our engaging conversation was regarding cultural differences and politics. Our intern, who has asked to be known as Ammar, his given name in Dubai, was very engaged in our discussion when I received a phone call from my business partner. We had been talking on the phone for a few minutes when a sea of red brake lights lit up both of our faces. The speedometer indicated I was going in access of 85 MPH. As I hit the brakes, phone in hand, Ammar let out a very small shriek as he realized the seriousness of the situation. He was genuinely afraid that he was about to be involved in a high-speed auto accident. Needless to say, the car was very much under control and that type of traffic I often experience during my business excursions.

This is a perfect analogy when thinking about the level of risk that any given client is taking with their investment portfolio. Truly, as long as traffic is moving swiftly and there are no accidents, most people love moving quickly on the expressway … heck, that’s why it is named the expressway. Same thing typically goes for the stock market. When things are moving swiftly higher, like they did last year as measured by the S&P 500, everyone loves the ride up. It’s very comfortable cruising at 80 MPH and just like with the stock market, when it’s rising quickly, we all can get to our destination quickly. Driving fast on the expressway and being in a very heavily stock-weighted portfolio, although exhilarating at times, can also end up creating moments of near panic and may cause inexperienced drivers/investors to make poor decisions and potentially end up in dire circumstances.

Volatility in the stock market often, just like abrupt changes in traffic patterns, can happen in the blink of an eye.

Some people, like myself, are willing to take the risks of driving faster and I understand that there will be times when I may have some close calls. For people newer to expressway driving the constant speed changes and weaving in and out of traffic can be quite unnerving.

When it comes to taking risk in your investment portfolio, determining your risk tolerance is not really about how much you like to make money as much as it’s about how miserable you feel when you lose money. A good rule of thumb may be that if you can’t go on a family vacation without checking on your portfolio, you may be overexposed to risk. There are many great tools available to investors to determine the level of volatility they can handle. Our firm has multiple new tools that we consider to be cutting-edge. Make sure you consult your financial advisor regarding the speed at which your portfolio is moving, and whether that still lines up with your goals and your tolerance for sudden traffic jams. As a public service announcement: arrive alive! Don’t for get to buckle up while doing your summer traveling.