Is Your Investment Strategy on Track?

Many investors wait until a pullback or a market correction to revisit their investment strategies. It is something you should do at least annually or whenever your goals and needs change. A common question amongst investors is, “When is the best time to hold your regular annual investment strategy review?” A good rule of thumb to follow is to treat your investment review as you do your annual medical checkup. There is no one magical time, but it should be done.

Review Your Risk Tolerance

According to Investopedia, “Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand.” They go on to say that, “You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.”

One of the fundamental guidelines of selecting investments for your portfolio is to understand your risk tolerance. This will many times dictate which investment choices are most appropriate for you.

Review Your Timeframes for Your Primary Financial Goals

When you are investing for short-term goals your choices can differ from investments you select for long-term goals. Through a process of establishing and understanding your timeframes, we can help you understand your possibilities. Your personal investment strategy could vary depending on how long you can have your money invested. Most investors try to categorize their primary goals into one of the three main categories: short-term; medium-term; and, long-term.

Short-Term Goals (less than 3 years)

Typically, the shorter the time that you need to reach your goal, the less risk you generally want to take. Remember, this is the money you've already accumulated to use for that goal and your investments should match that thought process. The money you have earmarked for short-term goals will need to be available relatively soon, so you might want to focus on safety and liquidity rather than more risk and growth. For your very short-term portfolio or funds you need to have available in one year or less, you might be more inclined to put your money into liquid areas, lower volatility investments or cash equivalent investments, which aren't likely to lose as much value in six months or a year. Liquid investments are those you can sell easily with little or no loss of value, including Treasury bills, money market accounts and funds, and other low-risk investments that pay interest. If those investments have maturity dates, the terms are very short. For example, Treasury bills have maturity dates of 13 or 26 weeks.

You also should consider alternatives that don't impose potential penalties or fees for accessing your money before a maturity date. For example, a 10-year CD might be safe, but the early withdrawal penalty is likely to cut into the money you are counting on for a short-term goal such as a tuition payment that's due next September.

Many of today’s cash equivalent investments are paying lower interest rates that potentially would not be enough to outpace inflation over the long term. However, if your plan is to use the money relatively quickly, inflation shouldn't have a major impact on your purchasing power.

Mid-Term Goals (3 to 10 years)

Choosing the right investments for your mid-term goals can sometimes be even more complex than choosing them for short- or long-term goals. Your goal is to achieve the growth that can help you build your assets while still protecting the assets you've worked hard to accumulate. Mid-term goals are typically those for which you can allow some time to accumulate. The more time you have, or the more flexible your actual time frame is, the more risk you can possibly afford to consider with your investments. As the timeframe for those goals gets shorter, you can gradually move some of those assets into lower volatility investments.

Long-Term Goals (more than 10 years)

Long-term goals are the ones that can sometimes allow the most flexibility. For many people, a long-term goal is a financially secure retirement. It can also be a goal with a long time horizon. When your goal is paying for a car, for example, you think in terms of paying costs up front or over a reasonable period of years. However, when you think about retirement, think in terms of managing your expenses, you may have to account for 20 years, 30 years, or maybe even longer that you'll be living after retirement. Since you will need some income for that entire period, it is important to attempt to earn a rate of return that outpaces inflation and allows your initial investment to grow over that time. A general rule is that the more time you have to reach a financial goal, the more investment risk you might be willing to take. For many investors, that means considering growth investments. As time passes, you can consider shifting towards less volatile investments.

While past performance is no guarantee of future results, historical returns consistently show that a well-diversified equity portfolio can potentially be a rewarding investment over the long term. It's also true that over shorter periods—say less than 10 years—investing heavily in equities can lead to portfolio volatility and sometimes even to losses. According to finra.org for, “Investors that have 15 years or more to meet your goals, you have a good chance of being able to ride out market downturns and watch short-term losses eventually be offset by future gains.”

We help clients list and think about their major financial goals including:

Buying a new car
Buying a home
Paying for a children's education
Saving for or living through retirement

Keep in mind that no goal stays short-, medium-, or long-term forever, and so the timetable for your financial goals will evolve over time. For example, retirement is typically a long-term goal when you're 30, but for most, it’s a short-term goal when you're 60. An investor’s methodology and choice of investment will need to be reviewed as they draw closer to each of their goals.

Also, over time your priorities or life circumstances can change. This can result in delaying certain goals by a year or two, while others you may want to try to meet sooner. And some, such as a second car that you were planning to buy or an expensive family trip, you may decide to forego altogether. It's important to stay flexible and adapt your timetable to your changing needs and priorities. Chatterton can help.

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. You should discuss any tax or legal matters with the appropriate professional.