What’s Your Investment Process?Submitted by Financial Planning Solutions, LLC on May 31st, 2018
One of the hardest things to do as an investor is to think logically, without emotion. The human mind will process facts but it is difficult to make decisions when there are conflicting opinions. This can give rise to confusion or even anxiety. In order to deal with this situation, another part of the mind intervenes—the emotional side. That’s why some people “go with their gut instincts.”
Investing with an emotional approach can be dangerous. Many people are tempted to invest with the hopes of making a lot of money. Greed can be risky because it ignores the practical, fact-based side of investing and often includes unrealistic return expectations.
While no one knows where the market will be tomorrow, investing with your “gut” is an unreliable approach.
We are not immune from the emotions of investing but we go to great lengths to identify situations when we may be influenced by non-fact-based thinking. As we review client portfolios and holdings we review the pros and cons of each investment and how it supports your overall goals. When it is time for a change, we consider the emotional inputs and try to remove them from the conversation.
How do we do it?
For starters, we take a long-term approach. There is a large body of research showing that short-term trading—and thinking—results in below average returns. Dalbar1 has published research for years showing that the average individual investor underperforms the broad stock market averages consistently over long periods. One of the main reasons is that investors tend to react emotionally to market changes, rather than planning ahead with an all-weather portfolio and sticking to their strategy.
We build practical portfolios based on widely-recognized asset allocation theories. We are not inventing a new mouse trap. The latest new investment can be interesting to talk about but, from our experience, new strategies take decades to prove themselves.
We use low-cost investment options. Index funds, exchange-traded funds and low-cost institutional share classes (as available) comprise your portfolios. The lower the internal expenses, the more you get to keep.
We employ tax-efficient strategies. Favoring tax-qualified accounts for income-producing investments, utilizing investments with high tax-efficiency, and including tax-free bonds in taxable accounts are just some of the ways that we attempt to minimize taxes (as appropriate). For individual holdings with large gains or losses, we construct a long-term plan that considers taxes, proper asset allocation and client goals for the specified account.
Lastly, we consider how your investments support each of your long term goals. How do you invest for retirement while keeping enough aside for daily living, paying for college, and buying a vacation home? Many of these decisions are inter-related and require prioritization and planning. That’s what we try to do for each of our clients. Of course, it is a dynamic plan--there always are changes happening along the way: a new job, buying a home, birth of a child/grandchild, death of a family member, downsizing, or taking care of your family.
Want to know more? Give us call. We’re here to help.
1 DALBAR, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. Source: Dalbar.com
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.