Studies on investor behavior indicate that many main street investors fall short of their investment goals over time. This significant “behavior gap” is a clear example of the perils of investor psychology to emotionally take action on short-term news and market information.
To better picture the severity of this problem, imagine a basketball player missing 2/3rds of their shots. This unfortunately is the reality for many investors of all ages whose retirement portfolio’s are barely keeping up with even a low 3.2% inflation rate over time.
Before you sit down and mull over your 401(K), IRA or individual brokerage account investment options, consider that your ongoing investment results may have little to do with luck or Wall Street insight. Instead, it has much to do with portfolio construction. So, put away the darts, ignore the egocentric cocktail-party chatter and forget your hunches. As eloquently stated by Ben Graham,” The individual investor should act consistently as an investor and not as a speculator.”
I am not saying you may not get lucky on a stock pick. Every dog has their day. You could go to Vegas and bet on black or red and win big, but that amount of risk-appetite may not be appropriate for your retirement savings. Our core maxim is that “performance without process is just luck.” We explain to our clients that the way to build and maintain substantial wealth over time is to develop a clear and repeatable strategy based on an investment policy statement and asset allocation strategy that reflects their unique financial goals and feelings about risk.
Practicing consistent and on-going asset allocation is an important habit every investor should follow, like brushing your teeth. Your selection of individual stocks and investments is secondary to the way you allocate your portfolio, which will be, perhaps, the principal determinant of your results. Asset Allocation is the foundation of Modern Portfolio Theory and the basis of portfolio construction.
Just like an artist utilizing the “three primary colors” as a basis to color development, your stock, bond and cash allocations represent your primary “asset pallet” and foundation to achieving the return and results you desire over time.
When starting out your portfolio risk-assessment, subtracting your “age from 100” to estimate how much of your portfolio should be invested in stocks can provide a rough starting point. We have all our clients complete a risk tolerance questionnaire each year as part of their wealth planning and asset management process. The asset allocation that works best for you at any given point in your life will depend primarily on your age, time horizon, financial objectives and your ability to tolerate risk.
Creating an investment strategy doesn’t have to be rocket science. Simply remember that investing is an a.r.t. – asset classes, risk and time.
Asset Classes are three general types of investments -stocks, bonds and cash. Liquid alternative investments can now be considered a fourth asset class. Your risk tolerance and time frame will help you determine just how much of your money is invested in each asset class and which risk model asset allocation is appropriate for you.
Risk in wealth management matters is usually thought of as investment risk- the chance that you might lose money on your investments in exchange for greater potential returns. But you have to balance investment risk with inflation risk – the chance that your money will not earn enough to keep pace with the rising cost of living over time. Consider that over time with a 3.4% inflation rate, the cost of living will go up 50% every 10 years. With many retirees living well into their 80’s and 90’s, don’ t be too risk adverse even in retirement.
Time is a powerful ally of any investor at any age. Not only will investments generally increase over time through the power of compounding, but time can also help you to ride out the inevitable ups and down of the financial markets. Your investment strategy will depend heavily on just how much time you have until you need your money.
Our belief is that it’s not by following the news-pundits, stock-picking or “timing the market” that will earn you the greatest reward, but rather “your time in the market” while employing a disciplined wealth management approach.
For more information on our firm or to request a complementary consultation please Contact Us today or call (561) 210-7887.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
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. Loss of principal may occur.
No strategy, including asset allocation, assures a profit or protects against a loss.
Investing involves risks, including possible loss of principal.