Why Did I Do That?

Humans are a curious bunch, aren’t we? Our brains work in one mode – survival. The programming of our brain is based on the strategies of fight, flight or freeze. Perhaps you have noticed these strategies at work when you find yourself in a dark alley, alone and facing a group of suspicious characters. Or, more often than not, you find yourself facing these strategies when investing your hard-earned money for the future.

Let’s examine one scenario that I have witnessed far too often when people are planning for their future. Having no particular knowledge of markets, money supply, economics or fiscal policy, and armed with only a social media account full of other lemmings (pardon the characterization) that are in the same situation as you, jumping out of the markets because of a perceived correction coming. Misery truly loves company! 

The better approach would be to apply a method of managing your assets in a proven strategy that considers risk and the role it plays in our overall economy. Rebalancing your account to manage the level of risk to that you are glad to accept knowing that return on investment can only occur when risk is accepted. For example, you may have heard we are holding a presidential election in the United States in a few weeks. Many people are hypothesizing the end of the economy due to this quadrennial event. What if you approached this event with a calm mind and an eye for a long-term approach to your investments? Great! You would be one of those investors who believe a short-term market decline does not derail decades of savings.

What I am referring to in the above scenarios is called behavioral finance or, in laymen’s terms, why smart people make dumb investment decisions. I am not calling you names again but wanted to be very honest in how this has been applied by individuals who ultimately regret their short-term poor judgment. One of my favorite quotes describing the secret behind the success of the famed investor, Warren Buffett, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Many investors are much smarter in their approach to lifetime income and savings by understanding the function of the markets in our country. If others are fearful and selling their investments, the wise investor may wish to buy during the downturn of the economy knowing that the prices will possibly be lower due to the oversupply of sellers.

If you are not retiring within a few months of the election, or even if you are, think about rebalancing your portfolio to an acceptable level of risk. Understanding that bond markets function inversely to equity markets, the strategically allocated portfolio will possibly suffer less volatility than a portfolio consisting of positions to chase returns. The person who utilizes a long-term approach to investing for her future with a sound strategy of diversified investments will be served better than those attempting to time markets and reap larger returns than that provided by the efficient movement of the economy.

Don’t make mistakes using short-term thinking when dealing with your lifetime income assets. Consider a consultation with a Certified Financial Planner professional to obtain a second opinion of the risk and strategic allocation of your assets. You may live with a little less stress about your future. Be confident. Be opportunistic when others are fearful. Look to the future. Live your life by your own design not the same mindset as the lemmings running for the cliff. See you on the golf course!

Related Podcasts

How Do You Define Risk?

Danger! Danger! Red flashing lights! Sirens breaking through the still night awakening you from a deep sleep! These are simple, yet effective, methods of alerting you to risks that arise in life. Don’t you wish investment risk were that simple to alert you when you are about to face an inanimate action that has the power to destroy your life savings?

We accept certain risks in life everyday. Once you leave the safety of your bed, you may be subject to risk. Let’s focus on one type of risk – financial risk. You can control the level of risk in your financial life by taking prudent steps to minimize risk when possible. For example, if you are 80 years of age, it may be too risky to invest in a new tech startup with 50% of your retirement portfolio. If you were 24 years of age, this may be viewed more as an opportunity.

As specialists in retirement planning, we believe it is critical to properly measure and mitigate risk when possible. Many of our clients come to us with portfolios that are highly illiquid or invested in a manner that is not in their best interest. When we ask questions pertaining to their acceptable level of risk, the client will generally be moderate or conservative in their approach to investing their hard-earned money.

However, after a careful analytical analysis of their portfolio we inform them of their current investment risk level and their eyes pop open like they are watching a scene from a horror movie. To mitigate the risk, we believe several factors must be considered in their portfolio design:

  1. Consider liquidity needs
  2. Research suitable and appropriate types of investment positions
  3. Determine the tax-effect of the proposed investments
  4. Properly diversify the portfolio to control the level of risk acceptable by the client.

Simply investing the portfolio in its initial allocation does not resolve the client’s risk issues. Proper monitoring of the performance and appropriate rebalancing of the asset allocation to its original target are critical to maintaining the client’s risk level in the portfolio. The financial planning required for an advisor to fully understand the client’s long- and short-term needs and goals entails significant education, experience and knowledge of the economy.

Certified Financial Planner practitioners are professionals that maintain one of the highest credentials as a witness to their competency and ethics. Don’t risk your lifetime savings to risk. What you don’t know could truly ruin your future. Ask for a second opinion regarding your retirement portfolio. Better to find out early if there is a problem in your future.

Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee or future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loass, including total loss of principal

Related Podcasts