When it comes to investments, it’s easy to want to dive right in, but often that mentality can lead you to trouble. A well-constructed financial plan could provide a roadmap for staying disciplined, especially when emotions run high.
One of the most important factors in achieving a disciplined investment approach is focusing on your goals and objectives before making any decisions. Portfolio construction and asset allocation won’t mean anything if you don’t know what you’re working toward.
Marrying your investment plan with an overall holistic financial plan is the key to seeing the big picture. There are obviously behavioral aspects that go into creating a more disciplined approach, but having a solid financial plan will allow you to stay the course through times of high emotion. After you establish your foundational goals, the next step in building your portfolio comes from understanding how much risk you are comfortable taking in your portfolio.
Typically, when we think of risk in a portfolio, we automatically think of financial risk – how much money do I have and how much can I comfortably allocate towards investments? – but there is also an emotional risk component. It has been well documented that the pain associated with loss overwhelms any joy and excitement that you may get from stock appreciation or doing well. Ask yourself, how much can I tolerate a drop in my portfolio when the markets take a downturn? What amount of loss would make me want to change my investment approach?
The worst time to figure out that you are not comfortable with your risk tolerance is right before the market bottoms when you have the potential for a big rally in financial assets. The idea is to work with an advisor to create a portfolio that you can hold strong with through the best of times as well as the worst of times. Research shows that if you stick with your investment plan and stay invested, the better you’re chances of coming out of times of market volatility in a good position.
The benefit of working with an advisor is that we have tools at our disposal that allow us to run scenario testing. We have the ability to see how your current allocation would stack up in past instances of financial stress such as the 2009 market crash or the start of COVID shutdown in 2020. Being able to see how your portfolio would have reacted during those events gives insight into the amount of risk you are actually comfortable with.
Markets are not static so your investment journey won’t be either. We have different needs and goals when we’re in our 30s, 40s, and 50s than we do when we’re in our 60s, 70s, and 80s. It is crucial to keep a consistent dialogue and to set a cadence of regular meetings, whether quarterly or semi-annually, with your advisor. It may feel unnecessary to meet regularly when moves aren’t being made, but those less incendiary meetings are great for sitting down, going through your portfolio, and covering your bases – Do you know what you currently own? Do you know why you own it? How do your investments fit into your overall goals and objectives?
Our team is committed to providing expert guidance and support to help you achieve your financial goals with confidence and clarity. If you are interested in connecting with one of our advisors, please contact us at [email protected].
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
