by TrustCore Research
I will give you the bad news first, though you are probably already aware: Runaway inflation is spurring the Fed to raise interest rates. Unfortunately, both factors are likely to continue, meaning market volatility will probably be with us for months to come.
The good news is that investors are not helpless, even now: By strategizing your portfolio’s balance and diversifying your assets, it is possible to—not just limit losses, but—see increased potential gains from your investments.
What Is Tactical Asset Allocation?
The method we recommend using for strategizing your investments is called tactical asset allocation (TAA). This investment strategy actually falls under the umbrella of strategic asset allocation. Rather than go farther in detail than I have space for here, it may involve a slightly more analytical approach to asset management than usual.
We start by studying everything from your acceptable risk levels to your ideal rate of return, taxes, time horizon, legal requirements, and more. Next, we assign a priority percentage; a weighting to each asset class for the long-term.
For example, you might opt to weight cash at 10%, stocks at 50%, bonds, at 35%, and commodities at 5%. The goal is to create an investment allocation with an eye toward reaching your financial goals. At the same, we balance your portfolio to safeguard it against stock market volatility.
Investor Policy Statements
In order to make certain that we are 100% in line with your financial objectives, we may ask you to create an investor policy statement (IPS) with us. This documents your preferred strategic allocations and serves as a reference for both of us going forward.
It also may serve as an anchor of sorts, should bear-market headlines and newscasts tempt you to overreact. No one likes the thought of losing, but knee-jerk reactions can lead to disastrous investment decisions if someone loses perspective.
The science of behavioral finance has long identified certain monetary blind spots called cognitive and emotional biases that can sidetrack us, if we let them. Most human beings have a bias(es) about something, so, like bacteria, they are not all harmful.
Nevertheless, emotional and cognitive financial biases, specifically, can become mental and emotional shortcuts; investors’ go-to-s for decision-making that take the place of serious analysis (or even logic).
For instance, the herd mentality bias drives some people to assume that any marketplace trend is a good thing. For better or worse, if others suddenly start panic-selling a certain asset or asset class, they feel a sometimes-irrational need to do the same thing.
The company in question may have an outstanding track record and potentially bright future. All the same, because temporary supply chain issues have lowered their shares’ current price tag—triggering a stampede of jittery investors—investors with this bias get spooked, as well.
As a result, drastically reducing your stock allocation feels like the right thing to do right now. However, if the market is actually making gains against its previous all-time high in six months, many of those who panicked will have cut themselves out of the additional equity.
Strategic Solutions
This is why having an IPS to refer to can help prevent poor decision-making by requiring a commitment: You are still in charge of your investments, but having specific data detailing why you are on a particular strategic path can help jog your memory. The IPS is tied to your financial plan that takes into account the expenses you and your family will incur along the way: housing, school expenses for children, etc.
For example, the details may include inexpensive, passive index funds. These are mutual funds within a portfolio designed to keep in line with a financial market’s index (typically the S&P 500).
Exchange-traded funds (ETFs) may be part of your strategized portfolio, as well. These are typically clusters of various financial instruments keyed into the same index. This could mean they track anything from commodities to stocks. The resulting advantage is that they are relatively low-maintenance for investors.
The idea is to reduce asset turnover and your operating expenses while broadening your market exposure. Therefore, some of the index and ETF funds are often sector funds, as well. These focus on a particular industry or area of the market; a sector.
Examples of sector funds can include shares of a computer company (in the technology sector), a citrus grower (in agriculture), and a healthcare equipment manufacturer (in the healthcare sector).
The goal, at the end of the day, is to diversify not just your portfolio, but your asset classes, as well. This often includes allocating across a variety of securities. By doing this, we increase your potential to profit from multiple areas of investments—while limiting your exposure to losses, should one particular asset dip.
Next Steps
Especially if you are an entrepreneur, we fully understand the do-it-yourself impulse that drives some to attempt all of this on their own. However, in time, some of the very same people wander in to us, seeking repairs to what remains of their ailing portfolio.
Knowing how to invest in a volatile market is not something that comes naturally to anyone. That is why we strongly believe that your best choice, particularly in times like these, is to work with Trustcore Financial Planning. Make us your financial advisor in Brentwood, Tennessee (and beyond) for retirement plans, wealth management, investment advice, and more.
Our experts have the skills and years of experience to help you weather the current economic situation. We never guarantee outcomes (because we cannot see the future any more than you can), but we are convinced that you are more likely to see optimal returns as a result of working with us, as well.
We are also fiduciaries. This means that as financial professionals, we are legally required to seek your best interests ahead of our own, no matter the cost to us. If you are between advisors—and possibly a little (understandably) skittish, consider setting up a complimentary meeting to see how we can help.
We take as much pride in our transparency and accountability as we do in our results. Feel free to review our case studies, (which show you some of our clients) and explore our website and resources. We have a free eBook for you, as well.
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