Tailoring an investment portfolio is no small task. Things are changing in the marketplace each day, but more importantly, your life changes. Your ability and willingness to take on risk change as life goes on. Your return requirement also shifts as you age. The proper investment portfolio changes with you, but your goals remain the top priority.
Imagine taking your teenage son to a car dealership to purchase his first ride. Maybe he wants a brand new Ford Mustang, but as a responsible parent, you are thinking of a pre-owned Ford Focus compact car that goes zero to sixty in 3.2 days. Your risk tolerance for your son is much less than his. Designing a mix of stocks and bonds is not exactly the same thing, but knowing the proper risk management strategy is critical.
As for your investment return needs, that can vary quite a bit too. An individual in her 60s with a multi-million dollar net worth and relatively low expenses does not need a very high investment return to ensure her goals are secure. On the other hand, a retiree with little savings and a high spending rate would need significantly more stock market exposure to make sure she does not run out of money.
So everybody is different, and everyone’s situation changes during their lifetime. But there are still some strategies we take that do not differ. At TFC, we focus on low-cost and transparent investing strategies. Exchange-traded Funds (ETFs) make up many of our portfolios – both stock ETFs and bond ETFs. We have a suite of portfolios that are designed to fit the risk/return preferences of all investors. We also use individual equities based on research and investment themes.
Dividends are also important to us. The security of a cash payment from the company to the investor is valuable. We screen the universe of stocks to find the best dividend yield plays. We also use high dividend yield ETFs to complement our equities.
We will work with you to select an investment strategy and portfolio, then will revisit your situation periodically to ensure you are still invested in the right mix of stocks and bonds. A set it and forget it approach is not always best since that is not the way your life works. Events like getting a big pay raise, marriage, having children, buying a house, retiring, an illness, an inheritance etc. all have a significant impact on what mix of stocks and bonds your investment portfolio should have. An investment policy statement (IPS) written for you will contain the intent of the strategy and the plan for managing your portfolio.
Rebalancing is another critical step in managing a portfolio. Rebalancing is what we do to manage the risk of market movements leading to a drift in the stock & bond mix. For example, if the stock market goes up 20% while the bond market is flat, then you will end up owning more stocks as a percentage of your portfolio. To combat this excess risk, we sell some stocks and buy some bonds. We ‘rebalance’ your investment portfolio to what was originally intended.
An often overlooked facet to managing a portfolio is the distribution stage. Accumulating investments during your working years is the easy part, but finally taking money out and spending it is actually a difficult hurdle for many long-term investors. We help our clients design a proper ‘drawdown’ strategy to ensure your lifestyle needs are met and your remaining assets are put to best use. We also take Social Security into account.
Taxes are another important facet to manage through both your accumulation stage during your working years and the distribution stage in retirement. We want to keep your annual tax bill at the right amount so we are taking advantage of low tax rates for some clients and deferring paying taxes for others who may be in a high tax bracket. Each person, family, and business is in a unique situation that requires its own due diligence.
An investment portfolio can also include insurance and annuities. Stocks and bonds can only do so much – other products are needed to manage risk. Managing a portfolio is a big task that involves a lot of numbers-crunching and decisions – this is our value to clients. We lift the burden from you, but also listen to your concerns to customize a financial plan to your situation.
Here’s the point
- Designing an investment portfolio involves analyzing your situation and selecting the proper risk and return requirements.
- Managing the portfolio requires revisiting your wants, needs, and desires periodically to ensure your portfolio is in the right place.
- The distribution phase can be a difficult one for investors. We work with you to customize a plan to drawdown your portfolio in retirement to meet your spending needs while taking Social Security into consideration.
- Rebalancing, managing taxes, and the use of insurance & annuities are also tools and techniques for managing an investment portfolio.
Action items
- Learn about risk and return. There is no free lunch in the investment world – the best thing we can do is get a proper measure of your situation, then tailor a portfolio to you.
- Start saving & investing now in basic accounts like a 401(k) or Roth IRA.
- Sit down with us to analyze your situation, develop a plan, and get you on the right track to hitting your financial goals.
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