A handful of clients lately have been asking if we should become more aggressive in their portfolios and shift some of the allocation from bonds into stocks. If we think about this, we’d be doing exactly what we’re taught not to do: we’d sell the bonds at a low point and buy the stocks at a high point. Isn’t the old saying, “buy low, sell high”?
That isn’t to say that we should stop our periodic investing through payroll contributions or automatic contributions from a bank account. Dollar-cost averaging, as it’s known in the finance world, allows us to diversify buying in between low points and high points and is a great way to weather the market as it runs its cycle.
I get it. These clients see the market continue to climb higher (although it hasn’t broken through the high it set January 26), and they probably hear the financial media “experts” telling them about how great the market is right now. They feel like they’re missing out.
But, many of these clients are the same people whose sole focus was on not losing any money in the market last year and two years ago. They had to be persuaded to take as much stock market risk as they did (although it’s an appropriate amount of risk for their situations) because they were leery of losing their money. Now, maybe they think, “What if I had put all of my money in stocks? I’d have made a killing!” Yeah, but what if you did have all your money in the stock market? There’s no guarantee that any of that money would be there tomorrow.
The grass is always greener.
One of the biggest value-adds that financial planners provide to clients is maintaining an objective view in times like this. Rather than arbitrarily trade client portfolios, and invest them more aggressively, we implement an investment process which is based on each individual’s financial plan. Without first having the financial plan, we wouldn’t have a very good idea of how a client’s assets should be invested.
The financial plan is the road map while the investments are one of the components of the car that are going to help us get to our destination. We’re not going to take a different route just because we think the scenery would be more beautiful when in reality it could dramatically lengthen our trip. We’re going to stay the course because our analysis shows that it’s going to get us to where we need to go in the most efficient manner possible and allow us to reach out goals.
We know that the market and the economy are strong, based on economic factors, and we know that it has done well since 2009. However, past performance is not indicative of future performance. When people first become clients, we agree to a portfolio allocation for them based on factors such as their goals, age, and risk tolerance, among other things. Typically, client portfolios become more conservative as they age and near retirement.
But it has been clients who are nearing, or are in, retirement who have been asking about adding more risk to their portfolios. However, the same can be said for younger investors – we shouldn’t add more risk to our portfolios just because we see the market climbing and we’re afraid of missing out. We should remain diligent and dedicated to our financial plan and not forget that it’s based on our own personal risk tolerances.
Don’t let the allure of what you don’t have get derail the plan that you’ve set forth to reach your goals.
