Avoiding Piecemeal Investing

Fragmented investing may result in panicky decisions andmissed opportunities for your finances. Thinking of your portfolio holistically and making decisions based on historic facts and trends are some of your best tools to minimize risks and produce positive returns over time.

In our previous article we discussed organizing the building blocks of your assets under the oversight of a financial professional, including your primary investment portfolio as well as neglected accounts such as forgotten retirement plans or unmanaged annuities.

How can coordinated oversight further enhance your investment management?

The best way to find the right asset allocation for you is to first look at your family’s goals and risk tolerance. You want consistent investment of all your investment accounts, including the neglected ones.

At first blush, your portfolio may have proper allocation between stocks and bonds, but your 401(k) and 403(b) retirement accounts and little-noticed assets tend to become orphans, invested however made sense at the time.

Without planning, you end up with gaps and overlaps in which you under- or over-allocate to asset classes (securities with similar characteristics and market behavior). This can lead to more market risk than you want or not enough risk to pursue returns you need to achieve your goals.

Investing, like many pursuits, has its own literature, studies, data and history. Understanding current and past investing contributes to better market decisions based on what’s happened before and will likely happen again. For example, despite sometimes serious downturns, indexes like the Standard & Poor’s 500 rose steadily over the past 64 years.

Then combine sound strategy with objective advice and tune out distractions to pursue your own highest financial goals.

The four basic keys to the strategy:

1.      Risk and return are related. Set in stone: Low risk accompanies low potential returns; high risk accompanies high potential returns. Increased market risk in your investments means you can expect increased market returns – over time.

2.      Asset-class investing helps you capture returns while minimizing risk. The market’s history paints a clear picture – if you want to see it. Asset-class investing hinges on the premise that particular asset classes exhibit particular risks and returns over time (examples of contrasting asset classes include stocks versus bonds, stocks of small companies versus those of large and U.S. versus international companies, among others). How you allocate your portfolio across various asset classes plays an enormous role in determining your expected long-term performance as different classes, not just different individual stocks, react to market conditions.

3.      Global diversification helps further dampen risk. Spreading investments around the world and across the risk/reward characteristics of asset classes diffuses the hits you suffer from downturns in a single market in a single country.

4.      Costs matter. Active trading means frequent trading – and frequent levying of traders’ fees. Passively managed funds track indexes and adjust automatically when a benchmark changes, so they don’t require expensive teams of managers which drive up your fees. These focus on efficiently targeting specific asset classes and help minimize costs that otherwise erode your eventual returns.

Invest according to evidence and reason rather than emotions and guesswork, and treat your entire portfolio for what it is: your guide to a secure future.

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Sheri Iannetta Cupo, CFP, is a principal of SageBroadview Financial Planning with offices in Morristown, N.J., and Farmington, Conn. The SageBroadview blog covers a wide range of financial planning and life topics.

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