“I just don’t understand the stock market.”
That comment has been shared with me on several occasions during my 35 years in the financial services industry.
In light of that confusion, Wall Street goes the extra mile to help make you a “successful” investor. I recently came across an online ad from a major Wall Street firm that encouraged me to conduct an “In-Depth Portfolio Analysis” of my investment holdings.
Hoping to find some answers, an investor may be tempted to click on the offer. How do I know if I am allocated properly between stocks and bonds? Am I invested in the top performing sectors? Should I tiptoe back into emerging markets? What funds will decrease my portfolio’s standard deviation to increase downside protection during the next bear market?
An in-depth analysis may answer some of these questions, but is this analysis truly helpful? And will it really make a difference in your pursuit of financial independence at retirement?
One component of investing that should make you a better saver is the confidence you have with the portfolio you create for yourself.
Building an intelligent portfolio to last a lifetime can seem daunting, especially through the eyes of Wall Street firms. It doesn’t have to be. In fact, creating a portfolio of tax-efficient, low-cost funds is pretty straightforward.
The big challenge comes not in the analysis of the individual investments in your portfolio, but in how you manage your financial affairs; specifically, the emotions you encounter when confronting the financial decisions you make in your everyday life.
To put it bluntly, reaching your financial goals will require that you turn away from the news- making headlines of the day — the slowdown in China’s economy, the contraction of the oil sector, or the upcoming election — and instead focus on that financial plan of yours to discover an adequate saving target while working, or spending target when retired.
Don’t get me wrong — directing your attention away from world markets and toward things you can control is a mighty challenge. Going forward, annual returns on stocks and bonds are almost certain to be significantly lower than their long-term averages of 10 percent and 5 percent respectively, and the volatility of the stock market, evident in the first half of 2016, is here to stay.
With lower returns and increased volatility in the forecast, the frustration level of a “do-nothing” portfolio increases, along with the temptation to make unnecessary changes in your retirement account. This dynamic has played out during the
past two years, when a diversified portfolio with a 60-40 stock-to-bond allocation has generated minimal returns.
One component of investing that should make you a better saver is the confidence you have with the portfolio you create for yourself. Low-cost, passively managed index funds allow you to maximize returns within each asset class — you get what the market gives you, and leave it at that.
Saving for a down payment on a home or car two years out is simple: Compute your monthly saving amount by dividing the total figure by 24 months, and place that money in a safe and secure account. But retiring at 67 with a portfolio that supports a meaningful lifestyle throughout your golden years is trickier. You have more moving parts to consider, like how much you can save today, the rate of growth of your portfolio, your annual burn rate (expenses), and personal inflation rate throughout retirement, on top of any pension income coming your way.
The yearly analysis of your financial plan can seem formidable, but that’s a good thing because it invites you to take a deeper look at whether your values and goals are aligned with your behavior.
In the end, making sure your decisions and financial resources accentuate your journey in life is what managing your money is all about.
This article appeared in the June 2016 issue of 425 Business.