The new year always seems like a great time to overhaul everything in our lives. Why not? It’s a clean slate. A chance for something different. The perfect opportunity to try and correct mistakes from the past year.
It can be enticing to do the same thing for your investment portfolio – turn it over, dump everything out, and try again. This may feel especially tempting during seasons of market volatility. But unless something has changed with your investment time horizon, objectives, or risk tolerance, there’s really no good reason to do it.
The market experienced an unusually long period of low volatility, so even seasoned investors may feel unsettled with recent drops. Keep in mind, though, volatility is a normal part of market cycles. As we head into a new year, it’s helpful to approach your portfolio and resolutions with a similar attitude:
Maintain perspective. Uncertainty is a constant, and downturns happen frequently. Unforeseen circumstances pop up, so sustaining new behaviors isn’t always realistic. Take a breath and keep moving forward.
Stay disciplined and set realistic expectations. Implementing a quick fix that doesn’t make sense for your long-term goals is similar to trying to time the market. It can be extremely challenging and could end up costing you in the long run. For example, on December 24, 2018, the Dow Jones dropped 653 points – its worst-ever performance on Christmas Eve. Just two days later on the 26th, however, the Dow added over 1,080 points – its biggest points gain in history.
Ask for help. Utilizing an advisor may help ensure your investment strategy aligns with your long-term goals, timeline, and risk tolerance. As with other goals in your life, this level of accountability can help prevent you from making emotional investing decisions.
Despite rising interest rates and worries about trade wars between China and the US, the US economy remains strong: growth is healthy, unemployment is low, the number of people working is rising steadily, and wages are up. As long as you maintain a strategy consistent with your needs and preferences, there is no compelling reason to change your investment discipline.
But it doesn’t hurt to check in on your financial goals and current circumstances – call the Shepherd Financial team to schedule your next review.
The Dow Jones Industrial Average is a widely-watched index of 30 American stocks thought to represent the pulse of the American economy and markets. Investors cannot invest directly in an index.
Valentine’s Day reminds us now is the perfect time for ‘the talk’ with that special someone in your life. And since this is a financial blog, I obviously mean the money talk. True, communication can be challenging, and the topic of money is a sore spot for many people. But the more you can speak honestly about money, the less fear and anxiety will be wrapped around it. The dialogue may look different based on your relationship status and life stage; regardless, it’s important to have the conversation now, as well as make room for future conversations.
You may benefit from making individual financial balance sheets, including all your debt and savings, before you begin talking. This way, you’ll have a better idea of your net worth. You may also compile a list of money questions or concerns you’d like to cover. It’s worthwhile to discuss your current financial situation, share values and long-term goals, and talk through spending and saving habits. Not being willing to talk about money can lead to big issues, both now and down the road. Open communication, though, gives the opportunity to create shared vision for the future, tackle problems as a team, and have accountability for your financial decisions.
Determine your own money values. This is where you’ll examine if you value saving or spending, as well as think about the various lifestyle standards you have. If you’re single and value the ability to travel, you’ll likely take that value into a relationship. Potential partners may discover conflicting values. Married couples may disagree about saving for college for their kids versus boosting their own retirement savings. It’s ok to disagree, but finding common ground is key. And keep the big picture in mind: creating safe space for ongoing dialogue about a positive financial future.
It’s also critical to come clean about your financial baggage. If you have student loan debt or a spending habit you’re having trouble kicking, hiding the issue will only compound it. (Literally – interest either hurts debtors or helps savers, but it doesn’t sit still.) Once you’ve talked about where you’ve been and where you are, look ahead. Are there any financial obstacles ahead? What are you hoping to do with your money in the future? Highlighting these can help you better see how to actually plan for the future.
Of course, not every money conversation needs to be so in-depth, but it helps to check in at least once a month to ensure you and your partner are on the same page, spot any problem areas quickly, and maintain momentum toward your goals. Your first financial talk together may be a little awkward, but with time, you’ll become fluent in a shared money language.
It’s easy to see why January is considered the start of new things – there’s a fresh calendar year and a plethora of resolutions get shouted from the rooftops. This feels like a chance to hit the reset button in many areas of life. At this point, you can see the race has a clearly-defined finish line – and it’s 12 months away. Of course, for some people, January is really right in the middle of the action. Maybe you’re gearing up for your second semester and looking at a somewhat shorter distance to the finish line.
No matter the length of your particular race, though, it’s helpful to have a good idea of what you’re getting into. As runners will tell you, there is a vast difference between sprinting 100 meters and grinding out a marathon. From race preparation and strategy to gauging your pace along the way, you will benefit from having a plan in place before your feet ever leave the starting line. At Shepherd Financial, we believe financial wellness is one important piece of whole-life wellness. So while we hope financial goals are part of your plan (and want to help you set and achieve those goals), don’t stop there. Pause and think for a moment about how financial well-being could positively impact the rest of your life. Do you want to pay off debt? Save more for retirement? Increase your charitable giving? Send your kids to college? Travel more? We can help you create a plan and work toward those goals.
It’s also important to realize not all runners are built the same. If you’re a sprinter, don’t force yourself into strapping on a hydration belt to run 26.2 miles. Set yourself up for success by running your race. You may find it useful to set smaller goals with shorter timelines. We believe each of our clients has a unique lens with which they see the world. Getting to know you, as well as your strengths and weaknesses, is part of our process – if we craft a financial plan that doesn’t fit your specific needs, it doesn’t make sense to pursue it.
Don’t forget your running buddies! When you head out to pound the pavement for a few hours, it’s nice to know you have a support system by your side. Think through what you want to accomplish, then find the teammates who will encourage you to get there. Because our focus is creating retirement-ready individuals, our team is constantly producing new tools and educational resources. We love finding customized solutions for retirement plan sponsors, participants, and individuals.
As the onslaught of end-of-school activities, exams, and graduation parties begins to fade, parents may heave a sigh of relief. Summer at last! The relief is short-lived, however, if you gaze slightly down the road. Whether your child is five or fifteen, college may very well be in their future. Have you begun thinking about how to pay for those expenses?
There’s simply no better time to begin planning than today. From harnessing the power of compound interest to hopefully avoiding drawing from your own retirement savings, there are a number of benefits to starting early.
One of the most flexible and affordable resources available to help fund a child’s future education is a 529 savings account. You can utilize tax-advantaged investing (earnings grow tax-deferred and are free from federal income tax when used for qualified higher education expenses), low fees and expenses, professional investment management, and potential state tax deductions or credits.* Here in Indiana, contributions to a CollegeChoice 529 account are eligible for a state income tax credit of 20%, up to a $1,000 credit per year.
In most plans, your choice of school is not affected by the state in which your 529 savings plan was established. Additionally, the funds in the 529 plan can pay for any eligible 2- or 4-year college, graduate school (including law and medical), or vocational/technical school. Tuition is not the only expense covered by 529 funds – other qualified expenses include textbooks, computers, and certain room and board costs. Even if your child is already in high school or uncertain if they want to go to college, you may still benefit from opening a 529 account. Aside from tax-deferred earnings, any unused assets may be rolled to another eligible family member’s account. Many 529 plans feature gifting programs that give family and friends a unique code to contribute to the account.
There are other funding options for higher education, including Coverdell Education Savings Accounts, federal and state grants, scholarships, and a variety of loans. If you have questions, our team at Shepherd Financial is always ready to help clear confusion and create solutions for your family.
Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend an institution of higher education. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals. Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 Plans may be available only if the customer invests in the home state’s 529 Plan. Consult with your financial, tax, or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other 529 Plan to learn more about the features, benefits, and limitations or that state’s 529 Plan. For more complete information, including a description of fees, expenses, and risks, see the offering statement or program description.
*To find out if your state offers tax deductions or credits for contributions, visit savingforcollege.com.
There are many similarities between portfolio-building and your annual March Madness bracket-building. For example, if you’re a fan of reading the small print in financial documents, you’ve likely seen something along these lines: “Past performance is no guarantee of future results.” (And you probably agree with that statement wholeheartedly if you’re prone to picking Cinderella teams like the Fort Wayne Mastodons or the Akron Zips.) But for both portfolios and bracketology, there can be a method to the madness. Consider these three steps:
Assess your risk tolerance
It’s important to remember all of your decisions regarding investing involve some degree of risk. You will need to evaluate these risks and determine if you want to take a more conservative or aggressive approach. An aggressive investor – having a high tolerance for market risk – understands the uncertain nature of markets and is willing to tolerate short-term losses in value to try and achieve better long-term results. Aggressive investors should understand the risk of loss with their approach. A conservative investor – having a lower tolerance for market risk – may favor investments that are more geared toward the stability and preservation of the original investment. Conservative investors should understand they face different kinds of risk with their approach, such as lower returns or not keeping up with inflation.
In bracket-building, understanding your risk tolerance can help you decide if it’s in your best interest to choose teams based on rank, school history, mascot name, or uniform color. The number of brackets you’re building may also affect your risk tolerance – perhaps you can afford to be very aggressive in one bracket while making more conservative selections in another.
Consider your asset allocation
In a portfolio, this is a strategy that helps you balance risk and reward depending on your chosen percentage of stocks, bonds, and cash. If you’re not sure where to start, there are many helpful investor questionnaires and online calculators to lead you through the risk tolerance and asset allocation determination process.
For your bracket, you might decide to allocate 60% of your picks on top-ranked schools, 20% on red uniforms, and 20% on teams with at least four syllables in their names. (Hey, no judgment here. It’s your allocation.)
Choose the right investments and rebalance periodically
Once you have assessed your risk tolerance and asset allocation, it’s time to select the investments to fit the strategy. Remembering not all bonds and stocks are the same, consider both the quality and investment objective of the funds you choose. Ensure the stocks satisfy your desired level of risk by looking at their category, objective, and where they invest geographically. When looking at bond funds, pay attention to maturity, yield, bond type and credit rating, and the general interest-rate environment. If you don’t feel confident in your ability to analyze these funds, ask for help. Diligent financial advisors should have carefully researched and developed models to recommend based on your particular risk tolerance and asset allocation – that’s why we’re here.
And when it comes to your bracket picks, stick to your selection strategy. While it’s thrilling to root for upsets, remember: a number 16 seed has not yet beaten a number 1 seed in the men’s tournament. Additionally, you may have to rebalance your asset allocation over time, because you certainly face the possibility of running out of four-syllable teams.
Following a thoughtful process can take some of the stress out of building your portfolio and March Madness bracket. Due to buzzer beaters, though, you’ll probably always have a little stress during the tournament. Let’s hope you picked the winner!
Asset allocation and diversification do not ensure a profit or guarantee against a loss. Past performance is no guarantee of future results.
Here at Shepherd Financial, we don’t like to make guarantees. There is too much uncertainty in life, people, politics, and the economy to promise we can give you peace of mind. (On top of all that, our compliance department simply won’t allow it!)
Rather than adopt a gloomy attitude about the whole situation, though, we try to live by some general rules of thumb when it comes to our investment management strategy. One of the most important is this: diversification matters. You’re undoubtedly familiar with the idiom, ‘Don’t put all your eggs in one basket.’ Well, that’s diversification. It helps you reduce the volatility of your portfolio over time by spreading your investments around and limiting your exposure to any one type of asset. The goal is to maximize return by investing in non-correlated asset types that would each react differently to the same event.
Of course, you should take both your time horizon and risk tolerance into consideration when thinking about your own investment strategy. And don’t forget that your time horizon will change. A reallocation of assets may make sense for you upon passing certain mile markers in your life.
Now remember: neither asset allocation nor diversification guarantee a profit or protect against a loss. But they may help mitigate the risk and volatility you experience in your portfolio.
If you’re already a diversified investor, you may be wondering about this discrepancy: the market seems to be doing very well lately, but your portfolio doesn’t reflect the same high numbers. There are two reasons: how you are defining the market and the very function of diversification. If you only look at the Dow, S&P, and other domestic stock indices, numbers are up. But many other asset classes have lagged. So while it can feel frustrating to not capture those market highs, your diversified portfolio is actually doing its job. Because of its diversification, it will likely never outperform the highest returning market index.
An underlying thread in how we think at Shepherd is, ‘It’s part art and part science.’ Whether that informs the way we advise plan sponsors regarding the design of their corporate retirement plans or individuals with respect to their investments, we know each situation involves unique factors and considerations. We believe our strength lies in taking deliberate time with our clients to understand those factors. As true in the portfolios we monitor as in the clients we serve, we know diversification matters.