Well, folks, we’ve done it, we’ve reached the fourth week of our visit to long-term investing land, and with that, I will share with you the final four keys to long-term investing resilience. So let’s begin.
7. Your goals and investments should always be in alignment.
This point is so important that it might as well be listed first, and that is that your investments should always align with your financial goals. Why would you, for example, invest in CDs when you are saving for retirement and you are 30 years old, for example? Doesn’t make sense! It is true that over time, your focus as an investor will shift from growing your portfolio to preserving it. However, that is why you design a financial plan that is both date and dollar specific but remains flexible enough to account for the unexpected in life.
Whatever your goals are, your investments should always be in alignment with what you are trying to achieve. Typically, this means using equities for growth and fixed income or bonds for capital preservation, although this is a very simplistic place to start and end one’s financial plan. Of course, a lot more goes into it. Another thing that is important to consider, if creating retirement income is the main goal for you, is your withdrawal rate. That is the rate and amount at which you take money from your retirement savings to replace your working income. If you have a withdrawal rate that is unsustainable, you may end up outliving your retirement savings, and that is something none of us want to do. Taking a look at the chart below, you will see the effects of different risk tolerances, asset allocations, and withdrawal rates on hypothetical savings.
What the above chart shows clearly is that an appropriate asset allocation and prudent withdrawal rate may help you meet your retirement income and estate planning goals.
8. Rebalancing is the foundational tool for staying on track.
Of course, once you have your date and dollar-specific financial plan thoughtfully created and implemented, staying on track within your allocations is fundamental to achieving your goals. As we all know, the erratic growth nature of the markets can easily send investment percentages askew, and rebalancing is the only way to ensure that you are on track and on top of what is happening within your investment portfolio. Take, for example, the chart below, which shows how the relative market performance of asset classes shifts over time, which may alter your portfolio’s mix of investments.
For instance, if stocks outperform bonds, your allocation to stocks grows, potentially increasing risk. On the other hand, if bonds outperform stocks and your allocation to stocks shrinks, you may miss out on potential growth. Systematic and timely rebalancing may help your investment portfolio stay in line with both your risk tolerance and your goals.
9. Understanding risk is paramount to investing resilience.
And before we wrap up, one more word about risk. While you can’t avoid risk, you may be able to manage it and insulate your investments against it by understanding its nature. And it is here that I want to stress something I talk about often in the retirement planning course I teach, that is, the fact that volatility and risk are two very different things. Volatility is not risk. There are many different types of risk, but volatility is a normal occurrence and very much needed to maintain market health, but it is not risk. According to the Economic Times, investment risk is the probability or likelihood of the occurrence of losses relative to the expected return on any particular investment. And I would add to the end of that sentence - “over the long-term.” Every investment comes with some degree of risk, and with the level of risk, we are willing to take on comes the potential of some reward, typically in line with the amount of risk we are willing to accept. The more risk we accept, the higher the potential reward. To put that in tangible terms, equity investors take on more risk than bond investors, for example, and therefore the expectation for reward is higher. So understanding what risk is and your tolerance for it is key to creating a lasting and impactful financial plan.
10. There are benefits to having professional help.
No one expects you to be creating your own financial plans, allocations, and rebalancing protocols. Not in the least, a financial professional — who knows your goals, temperament for risk, time horizon, and total holdings — could be your most valuable asset in any type of market environment because they can help you navigate all of these things, including your own emotions, far more easily than you’d be able to alone. In fact, according to Fidelity, industry studies estimate that professional financial advice can add between 1.5% and 4% to portfolio returns over the long term, depending on the time period and how returns are calculated.1
With that, we have come to the end of our discussion on the importance of taking a long view when it comes to investing. I hope I have given you plenty to think about and some solid tips with which to start off on a happy, healthy, and financially stable new year!
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
1 Value of advice sources: Envestnet, Capital Sigma, The Advisor Advantage ( estimates advisor value add at an average of 3% per year), 2019; Russell Investments 2019 Value of a Financial Advisor Update estimates value add at more than 4% per year); and Vanguard, Putting a Value on Your Value: Quantifying Vanguard Advisor's Alpha® O 2019, (estimates lifetime value add at an average of 3%). The methodologies for these studies vary greatly. In the Envestnet and Russell studies, the paper sought to identify the absolute value of a set of services, while the Vanguard study compared expected impact of advisor practices to a hypothetical base case scenario. Please follow the links above to see important differences in the methodologies of these various studies.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.