Beau Browning, ChCF | June 24, 2020
Focus On What You Can Control
Things have been scary in recent months. While it might be starting to settle down, there is still a lot of uncertainty. And one thing the market, to say nothing of investors, hates is uncertainty.
The stock market, economy, and the things that impact them are not within our control. Thus in turn investment returns cannot be controlled. But what we do control is a wrong focus & wasted energy. So instead, let’s focus on areas we can impact, which is a lot! And by doing so, we will increase the odds of better outcomes.
Investing Costs
It takes money to make money as the cliché goes but overpaying for investment costs can have a huge impact on your finances. One of the most impactful ways to protect your wealth is to eliminate unnecessary investing costs.
The first step to controlling investing costs is to know what they are. There are two kinds; transparent fees and hidden costs.
Transparent Fees
- Fund management costs: If you invest in mutual funds, you’re paying a fund manager.
- Trading costs: When you buy and sell securities, you pay a broker commission to place the trade for you.
- Advisor fees: Advisors use various fee structures including a percentage of assets under management, hourly, fixed, commission, and performance-based.
Hidden Costs
- Fund manager trades: Some managers work to minimize the cost of buying and selling within their funds and some do not.
- Your trades: The more frequently you trade rather than adopting a buy and hold, long-term investing strategy, the more it costs you.
- Tax implications: Funds can be managed in a way that limits unnecessary realized taxes.
Asset Allocation
Your portfolio will always go up and down with the overall market but having the right mix of assets can help insulate you from unnecessary risk. Your asset allocation should be based on your age and your risk tolerance.
Generally, the younger you are, the more heavily weighted your portfolio can be towards stocks. With a long-time horizon in front of you, your investments have time to ride out the ups and downs of the market. The closer you get to retirement, the more our allocation shifts towards bonds.
While time-horizons are somewhat one-size-fits-most, risk tolerance is not. Risk tolerance is individual to each of us. You do have to balance your level of risk tolerance with a strategy that will align with your time horizon though.
Taking too much or too little risk can leave an investor with the same problem; not enough money to meet their financial goals.
Tax Implications
We all know that we can’t control taxes but we can create an efficient investment strategy to minimize our tax bill. Holding investments in both taxable and tax-advantaged accounts may allow us to reduce taxes.
It also adds additional diversification to our portfolio. Diversifying by tax treatment is particularly important if you don’t know what tax bracket you’ll be in during the years ahead.
Consistent Contributions
Regular contributions to your investment accounts are an integral part of successful investing. Waiting until you have a big chunk of money and then dumping it into the market at once means you have to try to time the market. What if your timing is wrong? You run the risk of losing out to a down market.
When we make regular, consistent contributions, we’re practicing dollar-cost averaging, seeking a safer method of putting money into the market.
Dollar-cost averaging is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall price. DCA can help neutralize short-term volatility in the market.
How often should you be contributing? Bi-weekly or monthly is sufficient.
Your Emotions
Well, maybe we can’t always control our emotions! But we can control our decisions. And making investment decisions based on emotion is a losing proposition. Because what emotion do we predominately associate with investing? Fear.
When Wall Street makes headlines, they’re usually bad and those screaming headlines evoke fear in investors. At the other end of the spectrum, we have irrational exuberance.
Irrational exuberance refers to extreme investor enthusiasm that drives asset prices up to and beyond levels that are not supported by fundamentals.
Any decision we make based on emotions, financial or otherwise, often doesn’t work out well. This is why we created our financial plan, to keep us on track when things go off the rails!
A good financial plan takes changes in your life and the volatility of investing into account.
A Little Reassurance
We’ve all lived through market corrections and recessions before including “The Big One” in 2007/2008. And we made it out the other side. We acknowledge that our current situation is different, we didn’t have the added fear of a pandemic on top of an extremely volatile market.
So it’s understandable that you might need a little reassurance that your financial plan will help pull you through this situation too. If you have any questions or concerns, let us know. We’re here to help.
The opinions voiced in this letter are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification, asset allocation and/or dollar cost averaging does not protect against market risk.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.