Your Investment Portfolio Is Probably Riskier Than You Think

Investment Expert Shares Insights on Balancing Portfolio Risk in Today’s Market

Sometimes the most valuable investment advice isn’t about hot stock picks but rather understanding how to build a resilient portfolio. Christine Benz, Morningstar’s director of personal finance and retirement planning, recently shared her perspective on common investment pitfalls and strategies for long-term success.

According to Benz, investors over 50 should be particularly vigilant about their risk tolerance. “I sense a lot of complacency among older adults,” she noted. “As we age and become more battle-tested in terms of market ups and downs, we often feel more risk-tolerant, but our actual capacity to absorb risk has decreased.”

This disconnect between perceived risk tolerance and actual risk capacity can create vulnerability, especially since many investors haven’t experienced a prolonged economic downturn in nearly two decades. The last significant sustained downturn occurred 17 years ago, potentially leaving investors unprepared for future market corrections.

Benz recommends that older investors mentally prepare for potential downturns by proactively repositioning their portfolios to include “a runway of safer assets.” This approach provides a buffer against market volatility while protecting retirement savings that may be needed in the near future.

When asked about common mistakes in the current bull market environment, Benz pointed to recency bias as a major concern. “There’s a tendency to believe that whatever we’ve seen in the market will continue to persist,” she explained. This cognitive bias can lead investors to overweight their portfolios in recently successful sectors.

The current enthusiasm for AI-related companies and Big Tech names exemplifies this pattern. While Benz acknowledges these may represent “a higher-quality basket of companies than we had in the late 1990s,” she cautions against excessive concentration. “You want to protect yourself, and you don’t want to be huddled in those companies at the expense of everything else,” she advised.

For investors who struggle to manage emotions during market fluctuations, Benz shares a memorable analogy: “Your portfolio is like a bar of soap, and the more you touch it, the smaller it’s going to get.” This colorful metaphor underscores her recommendation to limit portfolio tinkering and avoid reactive investment decisions.

Instead of frequent adjustments, Benz advocates for a structured approach to portfolio management. “A good once-annual review of a portfolio is plenty,” she suggests. This disciplined review should include performance assessment, consideration of rebalancing needs, and evaluation of tax-planning opportunities, including charitable giving strategies like donating appreciated securities.

To maintain discipline during market volatility, Benz recommends using an investment policy statement as a guiding document. This formal declaration of investment goals and strategies helps investors stay focused on long-term objectives rather than responding to short-term market movements.

The current market environment presents unique challenges. Despite experiencing some volatility earlier this year, U.S. markets have been in an extended bull run, potentially creating complacency among investors. Meanwhile, technological innovation, particularly in artificial intelligence, has fueled enthusiasm for specific market sectors, creating the risk of portfolio concentration.

Financial experts like Benz provide valuable perspective in such environments, reminding investors that sustainable investment success often comes from disciplined portfolio management rather than chasing the latest market trends. As market conditions inevitably change, those who maintain balanced, appropriately risk-calibrated portfolios will likely weather volatility more effectively than those who allow emotions or recency bias to guide their investment decisions.

For most investors, Benz’s core message is clear: establish a sound investment strategy, review it periodically but not obsessively, and resist the temptation to make reactive changes based on short-term market movements or emotional responses to volatility.