For a financial advisor, evaluating the client’s tolerance for risk is one of the first hurdles to clear when strategizing a financial plan for any portfolio. Higher risks yield higher returns but carry the weight of potential high losses, while low-risk investing offers less return but invariably more peace of mind. The volatility of a portfolio can be measured using standard deviation, or the measure of dispersion of a set of data points from its mean. For example, a volatile small cap stock may have a high standard deviation, while the deviation of a stable large company stock is generally lower.
Here are a few tips to consider:
- Leave emotion at the door. Retirement investments are for the long term, and whether the Fed raises rates next month or the Cubs win the World Series, short-term market fluctuations and emotions tied to them should not impact the long-term plan.
- Use the bucket approach. Dissect investments into short term (0-2 years), mid-term (2-10), and long term (10+ years). Short-term capital needs should be in safe, interest-bearing, non-market fluctuating accounts in the event funds must be withdrawn at a moment’s notice. Mid-term investments can be invested with some degree of risk that is comfortable, knowing that it is accessible if necessary, but should be invested with the psychology that it is unavailable. Long-term retirement funds can be invested the most aggressively due to the long-time horizon and the goal of outpacing inflation.
- Review the draw down. Imagine how a portfolio would perform during different market cycles. It’s easy to pick a moderately aggressive or aggressive portfolio when the markets are performing well; it’s emotionally much more difficult to do so when the media is playing up dark days to come. The best assessment is measured by how a proposed portfolio performed in 1994, 2000-2002, and 2007-2009.* This analysis, combined with the 5 and 10 years average returns gives a basis for reviewing projected average returns and potential downside. If an investor is comfortable with the draw down, then he or she is more likely to avoid making rash decisions during market volatility.
The bottom line is that no one needs to go at it alone. Particularly for investors who don’t have the time, energy or desire, or don’t feel that they can keep their emotions out of the decision-making process, hiring a professional will help them navigate their financial future — and stay sane. It’s important to review an advisor’s background and credentials and request a list of references, all of which will help with the due-diligence process. It’s also essential to feel comfortable sharing thoughts and concerns and, above all, enjoy the process. Investing for retirement doesn’t have to feel as if it’s a game of chance, like the spin of the roulette wheel or the roll of a dice. It should be well thought out, organized and calculated, with the estimated cost of retirement at the core. By identifying long-term income needs based on an intended lifestyle, an experienced advisor can help anyone at any level develop a sound investment strategy that is realistic and on target to land on the right numbers.
*Past performance does not guarantee future results.
Taylor Boyd, vice president of Private Client Services, Burnham Gibson Wealth Advisors, Inc., a privately held registered investment advisory firm providing wealth management, estate planning and insurance services to private individuals while offering corporate clients comprehensive integrated solutions including pension consulting and business succession planning. Burnham Gibson’s wealth advisors provide the knowledge and resources to provide flexible, creative and consultative services.
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