Our team at Shepherd Financial is passionate about creating retirement-ready employees and responsible plan fiduciaries. One of the many ways we achieve these goals is through our extensive fiduciary training. Committee members and key personnel are equipped with critical knowledge to properly execute their roles and responsibilities. As a result, participants may achieve more successful outcomes, because their plan is carefully developed and monitored.
An important component of fiduciary training is learning how to monitor investments. This includes the following tasks:
- Setting overall objectives and investment strategies for the plan
- Selecting appropriate investments in light of these goals and strategies
- Monitoring the plan’s investment options on an ongoing basis
- Adding or removing investments, when warranted, over time
- Ensuring the investment options meet the provisions of the investment policy statement (IPS)
- Reviewing the organizational structure of the portfolio managers
As you think about investment selection and monitoring within your own plan, there are certainly many factors contributing to participant retirement readiness, but selecting an appropriate qualified default investment alternative (QDIA) is critical; without an approved QDIA, participants who are not actively engaged or knowledgeable in selecting their investment mix could wind up in a fund that is not suitable for their circumstances. An approved QDIA can consist of a target date retirement fund, a balanced fund, or a professionally managed account. Notice requirements must also be met for a fund to qualify as a QDIA.
Three factors should be considered when selecting the QDIA for your plan: your participant base, risk, and the elements of a periodic review.
1. Participant Base
Think about the characteristics of your participant population, such as their salary levels, contribution rates, typical retirement age, and post-retirement withdrawal patterns. Also consider their ability to stick with the default fund over time.
Risk, rather than returns, is a critical component impacting participant behavior. Make sure you understand the inherent risk associated with the QDIA – for a target date fund, examine the glidepath, asset classes, and how the asset allocation can impact participants at different phases (accumulation, nearing retirement, at retirement, and beyond retirement).
3. Periodic Review
In addition to performance, risk, and fees, determine if any information used in the initial selection of the QDIA has changed. Consider fund manager, strategy, or objective changes, as well as if your initial objectives for the QDIA itself have changed.
Shepherd Financial is a fiduciary, in writing, for each of our clients. Our commitment to this standard permeates our fiduciary training, fund screening, and due diligence processes, because we believe in working together with plan sponsors and participants to help pursue retirement health.
There is no assurance the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline, and, therefore, the value of the Fund shares may be less than what you paid for them. Accordingly, you can lose money investing in a Fund. A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchase throughout periods of fluctuating price levels. Please obtain a prospectus for complete information including charges and expenses. Read it carefully before you invest or send money. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
Risk-adjusted performance is the performance of a security or investment relative to its risk. One may calculate the risk-adjusted performance in a number of ways. One may consider the investment’s volatility. Alternatively, one may compare its performance to the performance of the marketa s a whole or relative to securities or investments with similar levels of risk.
Investments in Target Date Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The principal value in a Target Date Fund is not guaranteed at any time, including on or after the target date, which is the approximate date when investors turn age 65. Should you choose to retire significantly earlier or later, you may want to consider a fund with an asset allocation more appropriate to your particular situation. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility. All investing is subject to risk, including the possible loss of the money you invest. Diversification or asset allocation do not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
A Balanced Portfolio is a portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
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.