I had lunch with a friend that turned 40 years old last week. He mentioned that he runs in a few marathons. He used to run dashes. A marathon is a lot different from a 100-yard dash. Preparation is different, psychologically, mentally and physically you prepare differently.
He changed his portfolio over the last few years because of the market volatility. This new portfolio was geared towards mitigating risk in the next few months; kind of like a foot race but he is not considering the implications of the next 25.5 miles. Three things came to mind as I was looking at his new selections. First, I had my research assistant run some analytics on the two portfolios and then compared the old and new.
Old Portfolio:
- Centered on equities
- 10 year plus time frame
- Partially passive and partially active approach
- Focus on growth rather than risk, liquidity or safety
New Portfolio:
- 5 year or less time frame
- Focused on a possible need for current income
- Very risk adverse (actually underperforming the market by 2-3% annually)
After taking a look at his portfolio changes and the implications, I offered these three suggestions:
#1 Find a consultant that understands what you want to accomplish.
Sit down and let a planner you trust (that has a similar investment philosophy) really get to know who you are and what your family goals are. Talk about what you want your portfolio to accomplish. Complete that firm’s financial planning questionnaire, risk tolerance questionnaire, etc. Start out with someone who is a CFP or has a vast background in working with family planning situations and money. Pick a person who wants to keep you on track over the next 20-30 years.
#2 Develop an asset allocation that is right for you.
First you should clearly articulate your goals. After that is done, get the right mix of asset classes in your portfolio. Don’t worry so much about the actual investment selection – it has the least amount of validity in the entire process. Look for managers that have 10 years experience and an average or better track record. If possible select investments that have a small asset base. They may be more nimble than large investments.
#3 Meet annually with that planner.
And lastly, meet once a year (both you and your spouse) for an hour or two with that planner to discuss your goals, feelings, and perceptions of your planning. Reviewing your financial situation periodically is an important part of the financial planning process; it helps maintain forward momentum, establishes a checkpoint to assess progress, refocus efforts, and ultimately helps you cross the finish line you’ve set for yourself.
Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.
Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily hose of RJFS or Raymond James. Asset Allocation does not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.