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.
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.