Striking Balance in the Risk Equation

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As financial advisors, we are constantly having conversations with clients about the “R” word – risk. Managing risk is a critical aspect of achieving financial goals, constructing sustainable portfolios, and in general, living a more peaceful life, but the perceptions of risk can vary widely. Whether you’re a retiree enjoying the fruits of your labor or a business owner steering through the complexities of entrepreneurship, risk affects us all, and it’s crucial to find the balance between emotional resilience and financial stability.

I’m going to frame the distinction between two fundamental concepts: risk tolerance and risk capacity and explain why both need ongoing attention when planning and pursuing goals.

Risk Tolerance = Emotional Resilience

How comfortable are you with risk? Your emotional comfort level when facing market ups and downs is a big factor that plays into decision-making and financial planning. We call it risk tolerance but think of this as your psychological readiness to handle market fluctuations. For retirees, this may translate into how you react to seeing your nest egg fluctuate in value, while for business owners it could reflect your ability to withstand the uncertainties of market cycles.

As an industry, we have all sorts of tools to help clients and advisors identify their risk tolerance. A mentor of mine told me early in my career that the best portfolio for a client is the one that they can “stick with” in the good times and bad times. Admittedly, I probably didn’t fully grasp what he meant in that moment, but over the past two decades of working with clients, I’ve witnessed how emotions can spoil a client’s best-laid plans. 

My mentor wasn’t suggesting never to make changes, but rather to be very conscious of how changing emotions can play a critical role in long-term outcomes. At times it might seem burdensome but asking yourself how you’re feeling about various risks helps bring clarity, comfort, and confidence to issues that seem completely out of your control.

Risk Capacity = Financial Stability

While risk tolerance focuses on psychological factors, risk capacity deals with the more “black and white” financial ability to take on risk. It represents the ability to purely absorb losses without jeopardizing your financial well-being. If you’re a retiree, this means doing a deep dive into income sources and savings vs. expenses in the pursuit of meeting life’s ongoing financial needs over several decades. If you’re a business owner, it means looking at your company’s cash flow, debt obligations, and growth aspirations for what is on the horizon in various economic cycles.

Often, financial professionals will use “stress test” simulations to encapsulate a client’s risk capacity. The attempt here is to determine if a desired outcome is feasible based on where things are positioned today, where they could potentially go (good and bad) in the future, and actions that could be taken. This is probably a good time to mention that a goal needs to be defined to make this exercise worthwhile – something that can be elusive for some as wealth increases over time. I love golf and one of my favorite characters is six-time major champion Lee Trevino who is famously quoted as saying, “Pressure is when you play for five dollars a hole with only two in your pocket.” This mentality is a perfect display of high-risk tolerance, but low-risk capacity. While I wouldn’t dare challenge Mr. Trevino on the golf course, one can see how unnerving that attitude could be when it comes to your retirement or business. By quantifying your risk capacity, you can better understand how much risk you can afford to take within the context of your broader financial plan.

When it comes to retirement planning, there are several things you will need to consider and evaluate to begin identifying your risk capacity. This list is not exhaustive, but below are some things to ask yourself to begin formulating where you stand with your ability to take on risk.

  • How long will it be before you need funds?
  • What will your guaranteed income sources be? (i.e. Social Security, Pension benefits, etc.) How much will these amount to?
  • What are your current monthly and annual expenses? Will your desired lifestyle or expenses change in retirement?
  • If you’re currently working, how much does your income fluctuate in any given year?
  • What tax exposure do you have both now and in the future?

 

These are all good questions to be able to answer to start thinking about your risk capacity and how that pairs with your risk tolerance.

The Risk of Not Understanding Risk

Striking a balance of risk tolerance and risk capacity that works for you really is the pitting of the emotional vs. financial and the subjective vs. objective. In essence, it’s the capability to identify someone’s emotional readiness to tolerate investment volatility as well as their financial ability to withstand losses. It can be easy to confuse the two. 

It’s not uncommon for a client to convince themselves that they are ready to take on a risk that they are not truly comfortable with to produce their desired outcome, only to find themselves in a dire position in the future because the amount of risk taken did not coincide with their capacity. 

It’s also not uncommon to have opportunities missed where capacity is high, but the emotional readiness just isn’t there. While the former is less desirable than the latter, it does illustrate the importance of constantly assessing both in the context of pursuing financial goals.

Grasping the disparity between risk tolerance and risk capacity empowers you to make informed decisions aligned with your financial objectives. As retirees or business owners, navigating the complexities of risk management requires a balance between emotional comfort and financial prudence. Having conversations and creating an action plan with a team around you that understands this can help optimize risk-taking within the confines of your risk tolerance and capacity, paving the way for a secure and prosperous future.

Compliance Notes: Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Picture of David Hopkins CFP®, AIF®, RICP®, CEPA®
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Taylor Ewer

Staff Accountant

Taylor is a Staff Accountant at North Point Advisor Group. She holds a BBA in Accounting from the University of Minnesota – Crookston and has 10+ years of experience in the accounting world. Experience ranging from Accounts Payable and Receivable, Bookkeeping, Payroll, Fixed Assets and Inventory Management. 

Outside of her professional role, Taylor is married with two daughters. In their spare time they like to go outdoors and spend time with family. They enjoy hiking, occasional camping, hunting/fishing and 4-wheeling.

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Michayla Thielen

Administrative coordinator

Michayla is an Administrative Coordinator at North Point Advisor Group. She holds a BBA in Finance from the University of Wisconsin-Eau Claire, and has previous experience with trading and operations in the wealth management industry.

Outside of her professional role, Michayla enjoys dancing, baking, traveling, and exploring the outdoors. 

Michayla hopes to use her diverse experience and attention to detail to ensure that our clients receive exceptional service.

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Paul Woita

CLU®
Senior Advisor

Paul works to both help our clients and team member’s meet their personal and professional goals.

Paul began his career in the financial services industry in 1979 after graduating from UW-Stevens Point with a degree in economics. His passion for education has continued throughout his career, most recently receiving the CLU® (Chartered Life Underwriter) designation, which further facilitates his dedication to life insurance and estate planning specialization. Paul has been married for over 40 years and has two daughters, and two grandchildren who he enjoys spending his free time with.

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David Hopkins

CFP®, AIF®, RICP®, CEPA®
Chief Business Development Officer, Partner

David is both our firm’s Chief Business Development Officer and a Senior Advisor. David is passionate about growing our firm by working with clients throughout important stages in their lives. From college planning, to building a family, to retirement and everything in between, David services clients to work towards their goals.

David received his bachelor’s degree from the University of Wisconsin-Eau Claire. He also studied at The American College, where David earned his RICP® designation and completed his CFP® coursework. David is married and has two children. In his free time, David is a competitive golfer who enjoys the outdoors and a wide variety of sports.

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Steven Hoffman

CFA®
Chief Investment Officer

Steve has over 30 years of experience managing money for financial institutions, non-profit organizations, retirement plans and individuals, and has earned the Chartered Financial Analyst (CFA) designation. The market’s unique blend of statistical and psychological influences sparked Steve’s passion from an early age. He combines this experience and passion with a heavy dose of integrity and listening to provide impactful experiences for clients.

Steve is most at home in nature, whether that is hiking, kayaking, boating, skiing, motorcycling or music festivals. Steve has two sons in their early 20’s and recently published a spirituality/self-help book entitled Clear Vessels-Live a Clear, Joyful and Guided Life.  

Steven Hoffman is solely an investment advisor  representative of Great Valley Advisor Group, and is not affiliated with LPL Financial.  Any opinions or views expressed by Steven Hoffman are his own and are not those of LPL Financial.



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Amanda Bryant

Director of Operations

Amanda Bryant is the Director of Operations at North Point Advisor Group. Amanda joined our team in 2016. She works closely with our advisors and staff professionals in a partnership to maintain a strong culture of compliance to regulatory policies. With a focus on internal organizational systems, Amanda enjoys the opportunity to make it possible for the advisors to spend less time on back-office tasks and more time with clients.

Amanda lives in Forest Lake with her son and husband where they spend the summers outdoors hiking, kayaking and swimming and the winters skiing, sledding and sipping hot cocoa.

Focus
• Organizational strategy
• Operational strategy and workflow integration
• Compliance development and implementation

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Heidi Steffen

Administrative Manager

Heidi has a BS in Business Management from Cardinal Stritch University. Heidi is also licensed in life and health insurance. Heidi Steffen is the Administrative Manager and joined our team in 2021. She works closely with the Client Services team ensuring the North Point Advisor Group client services standard of excellence is met. As a member of the Operations team, Heidi works to assist in maintaining a strong culture of compliance, implementing company policies and procedures, and elevating company culture and morale

Heidi is married to her husband, Luke. In her free time, she enjoys spoiling her nieces and nephews, bow hunting and yoga.

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Steve Sadecki

Accountant

Steve holds a bachelor’s degree in accounting from Mankato State University. Steve’s experiences entail over 20 years’ experience handling accounting duties which include daily bookkeeping, payroll, benefits tracking, government filings, and preparation of financial statements.

Steve enjoys spending time fishing, hiking, golfing, and other outdoor activities in his free time.

Steve Sadecki and their Tax/accounting/CPA related services offered through North Point Accounting & Tax, DBA North Point Advisor Group. Steve Sadecki and North Point Accounting & Tax, a separate legal entity, are not affiliated with LPL Financial. Any opinions or views expressed by Steve Sadecki are his own and are not those of LPL Financial.

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Kennedy Johannsen

Accounting Paraplanner

Kennedy Johannsen started with us as an Accounting Paraplanner. Kennedy comes to us from WNB Financial as a Banking Specialist where duties ranged from maintaining relationships with key vendors, developing, implementing and monitoring electronic systems policies and procedures to processing ACH, wires and incoming and outgoing items. Kennedy has a Mathematics degree with a Minor in Psychology and has a love of excel spreadsheets!

As an Eau Claire native, she loves spending time outdoors with her dog Tater Tot, baking, doing crafts/DIY projects and has recently started growing her plant collection!

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Jeffrey Kolodjski

AIF®
Senior Advisor

As a Senior Advisor, Jeff works with a specific emphasis in the areas of retirement income planning, wealth transfer, and overall client portfolio management. He also helps with group benefits, including group insurance planning and qualified deferred compensation plans.

Jeff holds a Bachelor of Science Degree from Iowa State University and FINRA securities registrations through LPL Financial that include the Series 6, 7, and 63. In Jeff’s free time, he enjoys boating, biking, snowshoeing and neighborhood bonfires with friends and family. Jeff is married and is active in his local community.

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Matt Laciskey

CFP®, EA
Associate Advisor

Matt works with our clients to help them pursue their financial goals. Matt has a bachelor’s degree in financial planning and financial markets.

In his free time, Matt enjoys spending time with family and watching baseball, hockey, and football. Matt also enjoys tasting craft beers from local breweries.

Matt Laciskey is solely an investment advisor  representative of Great Valley Advisor Group, and is not affiliated with LPL Financial.  Any opinions or views expressed by Matt Laciskey are his own and are not those of LPL Financial.

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David Guild

EA
Associate Advisor

David comes to us from Concord USA in the Corporate Finance Division. His duties ranged from tracking client projects and consultant data while ensuring accuracy, processing client invoicing and vendor payments to reviewing and processing documents, invoices and payments related to employee expenses. Before Concord, David was with Washington County and 3M as a Financial Analyst. With a Degree in Business Administration with a Finance Emphasis – David’s true passion lies in personal finance.

David is an avid outdoorsman who enjoys experiencing nature in any form possible. His favorites include fly fishing, camping, backcountry hiking, and recreational sports. As a former volunteer firefighter, David brings a strong desire to utilize his knowledge and skills to help others.

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Joel Spitzer

Client Services Associate

Prior to North Point, Joel worked for five years in banking as a Teller/Universal Banker. While in school he also worked at Starbucks and interned as a Judicial Assistant for Eau Claire County. Joel recently graduated from University of Wisconsin Eau Claire with a degree in Finance and Political Science.

In his free time, Joel loves being outside and spending time with my friends. He enjoys hiking and is a “want-to-be runner.” He and his friends love trying new restaurants or recipes together.

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Abbey Glass

Paraplanner

Abbey is a Paraplanner at North Point Advisor Group. She has over 7 years of experience in the financial industry serving in a client services capacity, coordinating with both Advisors and clients to provide outstanding service and care. Abbey is licensed in both life and health insurance.

Outside of work, Abbey has a very active family with two boys who participate in year-round sports. She also loves to spend time traveling, being on the water, and finding new trails to take her puppy on.

Abbey hopes to use her experience and astute attention to client service to ensure our clients are always at the forefront of exceptional experiences.

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Mathias Beck

Paraplanner

Mathias has a BS in finance from the Carlson School of Management (UMN-Twin Cities). Before switching to finance, Mathias studied mechanical engineering and worked in the PCL Lab as an undergrad research assistant.

In his free time, Mathias enjoys golfing, lifting, and fishing. He is also an avid fan of basketball and coaches a youth team within his hometown district. On the weekends you may find him at a basketball tournament or up north enjoying the great outdoors.

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Matthew Olson

Senior Advisor

Matt comes to North Point after serving and guiding clients in making sound financial decisions over the last 19 years.  By educating and simplifying the complex world of financial planning, Matt aims to bring a sense of security and comfort to his clients, while helping them to look to the future with hope and optimism.  Matt holds his Certified Financial Planner ®, Chartered Financial Consultant ®, and Retirement Income Certified Professional ® designations.  He graduated from St. Olaf College in Northfield, MN while majoring in Economics.

Matt is married and has two children and a high energy Australian Shepherd.   He enjoys watching his kids do what they love and in his free time spends time outside mountain biking and enjoying all that Northern Wisconsin has to offer.

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Sheri Sorensen

Associate Advisor

Sheri is an experienced Financial Advisor and enjoys bringing peace of mind to businesses and families through sound financial guidance focused on client goals and values. Sheri received her Bachelor of Science degree in Business from the University of WI-Stout and an Associate of Applied Science from Chippewa Valley Technical College. She also studied at the American College where Sheri earned her RICP® designation. Sheri holds her Series 6, 7, 63 & 66, life, accident, and health insurance licenses.

She is married and has 3 children. She lives on a family-owned beef farm and to re-charge, likes spending time in the outdoors, traveling, visiting national parks, hiking, spending time on a lake or beach and scrapbooking.

I believe the secret to a fulfilling life is to be grateful for all that you have and do something every day that makes you happy.

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Jason Kell

AIF®
Retirement Plans Director

Jason serves as Director of Retirement Plans for GVA Retirement Consultants and partners with corporate and non-profit executives to improve and manage all facets of their retirement plans. He has provided independent advice and fiduciary guidance to corporate and non-profit employers since 2004. His entire 23-year career has been exclusively focused on qualified and non-qualified retirement plans. 

He assists plan sponsors in fulfilling their fiduciary duties and improving retirement plan outcomes through a focus on liability control, plan committee and employee education, cost reduction, vendor management, and improvement of plan-related operations.

As an Accredited Investment Fiduciary®, he possesses an extensive knowledge of the investment monitoring and management process. He is committed to being a lifelong student of the industry and pursuing positive outcomes through rigorous monitoring and service delivery to his clients.

Jason received his B.A. from the University of Delaware and enjoys coaching youth sports and spending time with his family.

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Mike Dolezal

CFP®, CEPA®
Chief Executive officer, Partner

As both our CEO and a Senior Advisor, Mike leads the team toward our long-term vision and works with a client base of business owners and high net worth individuals.

Mike has a BS in marketing from the University of Iowa and is a CFP® professional as well as Certified Exit Planning Advisor. Mike has his Series 6, 7, 63, and 24 licenses. In his free time, he enjoys hunting, fishing, golfing, and spending time at his family’s cabin. Mike is married with three daughters and is a proud board member for the Mahtomedi Area Education Foundation.

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