How Do You Know if Your Investment Portfolio is Working?
It would be great if you could simply check on the status of your investments and know immediately whether they are progressing in line with your long-term financial goals. But the truth is analyzing the overall performance of your portfolio is much more complex. From yields and rate of return to capital gains and losses, tax implications, risk and inflation, there’s an array of significant factors that go into painting your full financial picture. So, what can you do to gain clarity on whether or not your investment portfolio is actually performing?
Before you can make any type of assessment or achieve real peace of mind regarding investment performance, it’s critical to understand the components that impact overall success. To help you get in the right frame of mind, let’s take a closer look at some key insights about prudent investing.
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Tempering Your Expectations
People often expect to reap the returns they see listed in places like newspapers, money magazines and the web. However, it’s rare for the average investor to achieve the same outcomes that are published through these channels.
It’s quite natural to fear the unknown and to seek answers that provide a sense of certainty, but not ALL investment answers are founded on prudent strategy and proven principles. Just because there are financial “experts” from familiar news outlets doling out advice on how to see the kinds of returns populating well-known publications, that doesn’t mean it’s the RIGHT advice for your particular situation.
The most important truth to accept here is that if you seek long-term success with your investments, your ongoing expectations must be reasonable, appropriate and in line with a sound plan. This leads us to our next fundamental insight.
All investing comes with varying amounts of risk. Far too often, average investors underestimate the risk levels tied to their portfolios. It’s crucial to acknowledge that investment risk is not just the risk of losing your money; it also helps define your return expectations. Low-risk investments often directly correlate to lower expected returns. Because many investors fear losing money, they tend to choose the “safer” path. But there are no true certainties, and this decision could cost them the higher returns afforded only by higher-risk assets.Your investments won’t follow a linear growth pattern. You’re bound to face some losses and experience some gains. Generally speaking, the further away from retirement you are, the more comfortable you may be taking on greater investment risk.
Don’t make the mistake of equating investing to gambling. In essence, strategic investing is hardly a gamble. It’s true that when you purchase a stock, there’s potential for it to decline in value, but it also has the potential to rise again. What separates investing from gambling is that by purchasing a share of a company’s common stock, you buy a percentage of ownership in that business. On the other hand, when you place a bet at a casino, the buy-in does not provide something of value in return. If your bet wins, you get money back, but if it loses, that money is gone forever and has no potential for future gain.
Connecting Performance to Behavior
Successful investing is more about mindset than anything else. Even if you know what you should be doing to achieve your financial goals, your behavior can easily shift off course in response to the emotions that surface as a result of market volatility.
That’s why having a structured investment plan tailored to your unique needs and objectives is vital. If you stick to a plan that’s been carefully and prudently designed for you, it’s highly likely to work over the long term. Unfortunately, far too many people don’t do this. They allow fear to dictate behavior, often buying high and selling low, which is a major mistake with far-reaching consequences.Ultimately, you can’t be overly concerned with what’s happening in the market on a day-to-day basis. No one can predict what will happen in the future, and making important investment decisions based on short-term circumstances is one of the most dangerous moves for any investor. Therefore, it’s best to invest your money among a globally diversified portfolio based on a well-crafted plan -- and stick to that plan even when human emotion urges you to take conflicting action.
Heeding Smart Principles
As in any endeavor, there are certain accepted principles that can simplify your ability to achieve success. Even in investment matters, there are basic tenets you can employ to help garner the long-term outcomes you desire. These principles are simple, but they are frequently voided by average investors who allow their efforts to be steered by fear and faulty strategies, such as:
- Inadvertently chasing “hot” asset categories
- Inadvertently forsaking diversification
- Taking money out of the market as a result of panic
- Selling asset categories that are low and buying asset categories that are high
Capital markets are highly unpredictable, and they experience long periods of both relatively high and low performance. While most investors recognize the benefits of having a long-term investment plan and process based on smart principles, few truly demonstrate the discipline it requires.
Your goal as an investor should be to adopt and maintain lifelong investment strategies that integrate a solid understanding of capital market risk and a commitment to upholding the principles that guide success. At Hammond Iles, our financial coaches provide long-term investment strategies and help people navigate the sometimes confusing and overwhelming investing process.
- Own Equities and Fixed Income Assets: Investing in stocks is one of the greatest wealth creation opportunities known to man. Stocks (i.e., equities) are the only type of investment that has historically beat inflation. Most investors should allocate at least a portion of their portfolio to stocks.
- Diversify Among Equity Asset Categories: Diversification is a word thrown around carelessly in the investing industry. Although many use the term and say they doit, not everyone’s definition of real diversification is the same. At Hammond Iles, diversification means investing in stocks globally, in over 45 countries.
- Periodically Rebalance Your Portfolio: Rebalancing is necessary to maintain an expected risk/reward profile rather than chase performance. While it may be a simple concept, it can be very difficult for investors to execute. Rebalancing a portfolio allows investments to be sold when they are relatively high and bought when they are relatively low, but doing so often goes against our natural human instincts.
- Remain Disciplined Over an Entire Lifetime: Our financial coaches educate investors to make this easier for them. This a key difference between a financial coach and a regular financial advisor.
Answering the Big Question
Now that we’ve uncovered some overlooked truths concerning investment performance, it’s time to circle back to the initial question: How do you know if your investment portfolio is working?
The surface-level answer is this: Collect and synthesize the wide range of performance measures associated with investment status.
The more enlightened answer is this: Stop focusing on short-term performance altogether and put your faith in a prudent long-term plan. Rely on a qualified coach to help you design a portfolio that will suit you for a lifetime, and you won’t have to keep worrying about whether it’s working.
To find out more about overcoming your investing concerns and finally shifting your direction toward true peace of mind, get your free copy of the Investor Awareness Guide.
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About Greg Hammond, CFP®, CPA
Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.