a guide to
What to Think About Now cont.
/// CONTROL WHAT YOU CAN CONTROL
/// AVOID MARKET TIMING
Over our 20-year career in the industry, we have identified the three areas an investor actually has control over:
Every portfolio starts with an asset allocation that reflects the “fear/greed” or “risk/reward” position of the investor. Over time, due to market actions, a portfolio needs to be re-balanced. In a bullish market, equities grow faster than bonds; while in a bearish market, equities will lose value faster than bonds (which may even advance in value). Both situations can require an investor to rebalance a portfolio. What you want to avoid is “timing the market,” or making guesses about when to get out of or get into a particular asset class.
The amount of risk they wish to take The amount of time they need to invest The amount of fees they are willing to pay Risk comes in a lot of different “flavors.” Risk of pure loss (fear) and opportunity loss (greed) are the two most common. Therefore, it is important to determine how much risk is needed in a portfolio to meet future goals. This is accomplished by diversification of a portfolio – a way to divide up your investments between stocks, bonds, and cash. The amount of time you have to invest is a function of the goal you are planning to achieve. Retirement is a “squishy” goal, but everyone knows it is out there. Saving for a down payment on a home is another goal that would require a different investment approach and time period. So the prudent investor needs to manage investments to the time horizon of the particular goal. In summary, one with a longer time horizon may be able to tolerate more portfolio risk. The final element you control is expenses. This is an important item any investor can understand, yet so many miss this opportunity to improve their investment returns. Most investors save through their company 401(k) plans, most do not think about the amount of money they are paying to participate, assuming the company is taking care of providing them with the best plan and investment choices available. We have seen retirement plan expenses topping 2-3%, when the “going rate” today is more like 1%. Imagine saving 1-2% every year for the next 20 years! But what can you do to understand the fees you are paying? There are a couple simple steps to take:
If investing outside of a company sponsored retirement
plan, stick with low-cost mutual funds from providers such as Vanguard or Fidelity.
Despite what you may read or hear it is impossible to consistently “time” the market. The best approach you can make is to determine your “risk/reward” based on the savings goal (i.e. retirement) and design your portfolio to meet that goal. At periodic points, which may be quarterly, semi-annually, or annually, you can rebalance the portfolio back to some pre-defined strategic allocation that makes sense for you.
/// THINK LONG TERM Finally, since most investing is geared to retirement, the last topic is the concept of “long term” investing. The greatest investor of our generation, Warren Buffett, thinks in this fashion, paying little heed to the daily market gyrations. His approach is to buy good quality companies and hold them for a long period of time. Mr. Buffett has a very well-defined sense of risk and reward. Investing, in the sports vernacular, is a “marathon not a sprint.” We suggest that you set your goals, define your risk/reward tolerance, and assemble a low-cost portfolio of good quality mutual funds for your investments. If you are investing for retirement in a 401(k) plan, make sure you know the fees you are paying and pay attention to those announcements about the plan from HR, especially the ones about fees!
If investing inside of a company 401(k) plan, ask your HR director for information about the plan’s expenses. New regulations require fee disclosures to be provided to you (called 404(a)-5 fee disclosures).
Ask your HR Director how long ago the company’s plan
was reviewed for a potential change of record-keeper and Administrator. New plan features and low-cost funds have flooded the retirement market making plans more efficient for participants.
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Foglia and Paglioni are the Principals of Integer Wealth Advisors Group, LLC, a private wealth management firm for individuals and institutions. They have managed investment funds for the ASE and ASEF since 2005. Tom and Sam can be reached through their website at www.integerwealth.com.