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.
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.
For nearly two years, our team has conducted a monthly financial wellness webinar for participants in the retirement plans we advise. These webinars focus on different topics meant to engage participants with their overall financial wellness. Some of our most popular presentations have been our Quarterly Market Reviews, The Basics of Investing, and Dealing with Financial Stress. We have one particular webinar so relevant, though, it’s been requested multiple times and in a variety of formats: Women and Investing.
But why? What’s the big deal?
The truth is, women face a totally different financial environment than men. With an ongoing gender disparity in compensation, years worked, risk tolerance for investing, healthcare costs, and overall lifespan, it’s no wonder there is an undercurrent of fear and confusion surrounding finances. Studies have revealed women do not feel confident – or even comfortable – discussing money or investing with friends, partners, or financial professionals.
Nearly 90% of women will end up managing their finances alone at some point in their lives1, whether due to not getting married, divorcing, or having their spouse pass away. This means learning to navigate expenses and medical/long-term care decisions on one income and without a partner with whom to plan.
So the big deal is this: women are falling far behind men when it comes to saving and retiring on their terms.
Our team simply refuses to settle for this reality. We want to empower women to ask – and answer – questions like these:
How should I initiate financial conversations with my spouse?
What’s a good plan for divorced ladies?
How soon is too soon to begin estate planning?
As a single woman, how do I get started when I feel so overwhelmed?
The process is simple, though it may not be easy.
Start by making a plan. Make it a priority to understand where you are (track expenses and create a budget) and where you want to be (create short-, medium-, and long-term goals). Identify areas where you need help (perhaps learning to invest, paying off debt, or determining your retirement income needs). Once you’ve done that, educate yourself – it’s good to engage in your own financial wellness! Make sure you figure out who’s on your team. It’s unreasonable to think you can or should do everything yourself. We have accessible, knowledgeable team members to make it easy on you. Take advantage of our resources and tools available. Finally, keep making the next right decision. Monitor your portfolio, stick to your plan, and look ahead.
Don’t let fear keep you on the sidelines of your own life.
1 National Center for Women and Retirement
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.