June Newsletter

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June 2025 Financial Insights Newsletter

By Genti Cici, CFP, CAIA

Date: June 5, 2025

Risk is everywhere we turn, whether we see it, calculate it, or think about it. In general, we’re not great at judging risk, often overestimating or underestimating it. Risk has a lot to do with the probabilities of an event happening compared to all possibilities over time, but our shortcuts—relying on what’s in front of us, in the news, or what fits our biases—can mislead us. For instance, many overestimate the risk of a plane crash (a mere 0.00001% fatality rate per flight) and feel anxious boarding a plane, while underestimating the risk of heart disease (a 1 in 6 chance globally over a lifetime) and neglecting diet or exercise. This month, our writeup focuses on understanding and managing risks in your investment portfolio to invest with confidence.

Here are the key points of effective risk management:

Risk Assessment:

For each new client, we conduct a Financial Planning review, evaluating family income, expenses, assets, debts, monthly cash flow, and income source concentration. We stress-test “what-if” scenarios—like emergencies or market shifts—to see if your plan holds up. Stress testing isn’t just for banks; it’s critical for households too.

Liquidity and Emergency Funds:

Knowing how many months you can fund without income or in the face of a major unexpected expense is key to household risk management. We help you build or maintain an emergency fund to avoid selling investments at inopportune times.

Asset Allocation:

We start with your time horizon and risk tolerance (how you’d feel if the market dropped temporarily) to determine the right mix of riskier assets (like stocks) and safer ones (like bonds). Asset allocation drives over 95% of portfolio returns, so getting this right is essential.

Why Even Take Risk?:

The answer lies in the reward—potentially much higher returns than keeping everything in an FDIC-insured savings account. Not taking risk has its own risk: your assets may not grow enough to achieve your goals. We aim to take risks wisely while avoiding unnecessary ones.

Diversification:

The #1 factor in portfolio risk management, diversification means investing in thousands of unrelated, uncorrelated companies, industries, and regions. This reduces company- or industry-specific (unsystematic) risk, lowering overall portfolio risk while still aiming for strong returns.

Systematic Risk:

While diversification reduces company-specific risk, the risk of being in the market—systematic risk—remains. Macro events like recessions, interest rate shocks, or pandemics (like COVID) affect everyone. These shocks often reverse over time, so staying informed and disciplined is crucial.

Behavior and Knowledge:

Your behavior during market panic or greed can make or break your financial plan. Selling during a downturn when your goal is years or decades away is a common mistake that costs not just money but time to recover. Sticking to your plan, grounded in market history, helps you weather systemic shocks.

As an example, the S&P 500’s worst 30-year average annual return, looking at all 30-year periods (green line on chart below) from 1928 to 2025, has been +8% annual, spanning nearly a century of market history. This figure represents the lowest 30-year average, not the best or median. Understanding this can shift investors with long-term goals from panic and fear during high uncertainty into persistence, patience or further investing during such times.

Risk management is about understanding how markets work, diversifying company-specific risks, building the right asset allocation, and planning for life’s “what-ifs.” With the right approach and guidance from advisors like us, you can take the risks necessary to achieve your goals while avoiding those that don’t serve you. And, that’s how you take risks with confidence.

Ready to review your portfolio or start your financial plan? Contact us today to ensure you’re prepared for the journey ahead.