In this issue:
In all market environments, it’s important to understand the fundamentals behind your investment strategy, portfolio composition and overall financial plan. Understanding the underlying elements will help you advance your financial objectives and can provide well-founded confidence that may just help you stick with your plan in times of uncertainty.
Three essential elements hold up the structure of a well-balanced portfolio: Risk tolerance, asset allocation and that most ubiquitous of investment terms, diversification. They each complement and strengthen each other.
One of the most critical elements in investing, your tolerance for risk informs your asset allocation, which in turn determines how well-diversified you are. To evaluate your tolerance for risk, it may be most helpful to think in terms of dollars. If your latest monthly statement on your once-$750,000 portfolio now reads $598,000, how are you going to react? That’s a 20% decline – not outside the realm of possibility – so if seeing the number raises concerns, it may be time to rethink things with the help of your advisor.
Your true risk tolerance, along with your time horizon, provides guidelines for allocating your capital among different asset classes – including stocks, bonds, cash and other investments – and each carries its own level of risk.
The classic balanced portfolio of 60% stocks / 40% bonds can provide a good initial reference point, but there’s also nothing wrong with cash, especially for near-term goals. Your advisor can be very helpful here, so it’s vital to provide your total financial picture, including securities you hold in other accounts and property such as vacation homes or boats.
Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Your time horizon – when you’ll need the money – plays heavily into what asset classes you include in your portfolio. You’ll likely make different investment decisions depending on whether you’re saving for a short-term goal, like a down payment on a home, or a longer-term one, like retirement.
Someone just starting out may be willing to assume greater investment risk as a trade-off for potentially higher returns given the longer time frame available to offset potential losses, while those approaching retirement may prefer less risky investments.
Once you have settled on an overall asset allocation, make certain you are well-diversified within each asset class and investment style. Non-correlated investments, those that move independently of each other, can help your portfolio weather market gyrations better.
Once you’ve got the details down, the second stage is to automate your investing – a way of committing to the plan. There are two benefits here: 1. Dollar-cost averaging,* in which you’ll buy some assets at higher prices and some at a discount, thus averaging out your total cost basis; 2. Compounding, which is the time-tested strategy of letting your investments continue to grow unabated, allowing your wealth to multiply itself over time.
The financial markets have an endless capacity to surprise, so it’s important to remain flexible and think of your financial plan as dynamic – something built on time-tested principles but also something you revisit periodically and can revise if conditions change fundamentally.
*Dollar cost averaging does not assure a profit and does not protect against loss. It involves continuous investment regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue purchases through periods of low price levels.
Regardless of your age or current health, mapping out a clear plan for your estate will help avoid unnecessary turmoil for your loved ones. Estate planning goes beyond wills to include trusts, powers of attorney and letters of instructions. Talk to your advisor about what you need, and be sure to look out for these common mistakes.
There is much comfort in taking preemptive measures to ensure your affairs are in order. Your team of financial and legal professionals can address any concerns you might have and help to institute a plan you’re comfortable with.
It seems inconceivable, but the Couples Retirement Survey by Fidelity Investments recently revealed that over 40% of couples don’t know how much their partner earns. Yet having a solid understanding of your financial status as a couple is crucial to planning, budgeting and saving toward your goals. To get in sync, make sure you have the answers to these questions.
Material prepared by Raymond James for use by its advisors.
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