Years ago, when I commuted by train to New York City, I remember feeling powerless and frustrated by delays. I would feel my blood boil if there was the threat that I would be late. Once I accepted the fact that I was not in control of whether the train would arrive on time, and took responsibility for what I could change — my commute became downright productive. I left myself more time to get to the station; I took an earlier train so that even if it ran late, I would still be on time; and finally, I always kept work or reading material at the ready to utilize the time spent commuting in a productive way. Investing is a lot like the train ride. It may be unpredictable and you may get anxious, so what can you do to make the most of this experience, instead of allowing yourself to be swept up in frustration? Plenty; but to be effective you can’t get emotional and you can’t panic. Take this time to assess what you have been doing, and whether or not your strategy needs adjusting. Here’s a step-by-step plan to empower you in these unsettling times:
1. What do you own? It is surprising how many people have tens or hundreds of thousand dollars invested, and yet they are not sure what they own, or what their portfolio is designed to do. Looking at your asset allocation (how your investments are spread out in the investment arena) is quite important. In fact, Ibbotson Associates, a leading authority on asset allocation, found that 92% of investment returns are determined by the types of assets owned. Market timing (buying high and selling low) accounted for just 6% of returns, and individual security selection accounted for a mere 2% of returns. Meet with your financial professional and discuss how your portfolio is invested not just between the broad categories, like stocks, bonds, and cash, but more specifically in what types of securities. For example, stocks (ownership in a company) can be grouped by capitalization (size), as in large, medium, and small. Stocks can also be classified by style: growth stocks are those that are expected to grow quickly; value stocks are thought to sell for less than they are worth (a “marked down” item, so to speak). Stocks can also be domestic (US), foreign, global, or from emerging parts of the world economy. Bonds (a loan) also fall into many categories, and can be issued by the US Government (or other governments), corporations or state and local municipalities. Alternative type investments, such as real estate, oil, or gold also can play a limited role in a portfolio and act as a hedge. Make sure the mutual funds owned in all portfolios contain different types of securities, or you run the risk of weighting your portfolio too heavily in one area; a market correction in that area would affect your investment results twice as hard. If you are not working with a professional, now may be a good time to consider working with a fee-only advisor, such as our sister company, ATI Investment Consulting, Inc. because this analysis takes time and needs to be done thoroughly to consider and minimize investment risks. Also, your situation may have changed since you constructed your portfolio. Make sure your asset allocation strategy considers:
- Your time frame/goals;
- All investments in all accounts;
- Investment overlap in individual stocks owned and in mutual funds;
- Different asset classes (stocks, bonds, etc.), different market capitalizations (large, mid and small companies), different investment styles (growth, value) and different markets (US, foreign, emerging);
- Where the investments are owned (in a taxable brokerage account, or in a tax-deferred retirement account) because investing without being aware of potential taxes can result in “giving back” your returns in the way of taxes; and
- If the risks assumed are worth the potential reward.
2. What is it costing you? Having investments and not paying attention to the costs is a sure-fire way to handicap your potential returns. If two portfolios own the same investments (such as the S&P 500 Index), but one’s fees cost 0.20% and you own the other, which costs 2.35%, immediately you have reduced your returns substantially. In a volatile or down market, paying higher fees can make generating a reasonable return quite unlikely. Most important, though, is what you forfeit over the long-term when you pay high fees. As investments compound over time, the cost of high fees becomes more damaging. Let’s assume these two investments each returned 10%. After the deduction of fees, the returns are dramatically different: the high-cost investment returned 7.65% versus 9.80% for the low-cost fund. After many years, these fees would really impact your bottom line. If you invested $10,000 in each of these investments, after 30 years, the high-cost investment would be worth $91,289; and the low-cost mutual fund would be worth $165,222 – nearly $74,000 more than the high-cost investment. Of course, this example is hypothetical and does not reflect past or future results for any investment. Click here to read more a more in-depth discussion about fees.
3. What is your plan? Again, the power lies with you. Maybe you have left your investments untended and the stock portion of your portfolio is larger than it should be. Maybe you have not left enough of a cash reserve to cushion the blows from difficult markets. Perhaps you would benefit from a gradual reallocation of your assets towards a more palatable allocation that won’t keep you up at night. Maybe you have kept too much in cash and are not earning anything and could benefit from buying low as opportunities arise in this volatile market. Again, sit with your professional and really go over your objectives, time frame and tolerance for risk (keeping in mind, of course, that an all cash portfolio guarantees you a negative return in this low interest-rate environment). It has been our finding in working with clients, that accepting 60% of the market’s gains is well worth the protection of declining 60% less than the market in times of trouble. We lean toward a more balanced portfolio allocation for our clients for this reason.
Remember, until you sell something, you haven’t lost anything. But looking for ways to buy low and adjusting your portfolio to assume less risk and to pay less in fees will certainly benefit your long-term results in a meaningful way. The control is yours to seize. You can choose whether to allow yourself to feel stranded, waiting for the train to pull in, or you can use this time to make sure you are ready to climb aboard when the opportunity presents itself.
We’re here to help should you need guidance: contact ATI Investment Consulting, Inc. at 631.675.1420.