When it comes to investments, perspective is everything. As advisors, one of the questions we are often asked goes something like this: “In light of the [insert scary news headline of the week here], would you recommend any changes to our portfolio?”
Let me be clear upfront: I am by no means diminishing the importance of this type of question. As an advisor, if my client is concerned or curious about something, I want to know about it so we can talk it through together. We know that these questions are essential in the partnership between an investor and advisor.
Essentially, the core question being raised here is: “What changes, if any, should be made to a portfolio in response to a current news headline?” The answer we provide to this question will vary based on the time horizon for the money.
Join us as we discuss the perspective needed for both short- and long-term investments, and the most important considerations for each.
Proper Perspectives for Short Term Investments
Short-term investments are ideal when money will be needed relatively soon (within the next 3-5 years). One of the biggest risks for this type of investment is a sudden drop in the stock market.
If the market drops suddenly, during a short-term investment, the client does not have time to ride out the downturn, as the investments have a short lifespan. That is a plus when clients need funds to be available in a shorter timeframe, but it does make these investments more susceptible to sudden market drops.
As a result, if we identify that money is going to be needed within this timeframe, we will often recommend investing it in a portfolio mostly comprised of cash alternative investments (such as money market mutual funds) and short-term bonds.
Long Term Investments
For money that will not be needed for 10 years or more, we are not as concerned about a sudden market downturn occurring in the next few months. That client has a long time horizon and, in most cases, can ride out the downturn.
However, one of the biggest risks for someone with a long-time horizon is inflation eroding the value of the money. As a result, we will often recommend a heavier allocation to stocks for this block of money. Historical stock market research has shown that stocks are generally a very good hedge against inflation over long periods of time.
The following chart does a good job of comparing long-term rates of return for various investment classes against inflation:
Plotting an Intentional Course in Dynamic Markets
We live in an ever-changing world. Circumstances change frequently, which in turn impacts financial goals and the time horizon for money. As a result, Master’s puts a high priority on meeting with our clients regularly to ensure that their portfolios are positioned properly.
If you, or someone you know, could benefit from the proactive, intentional planning services we offer, please reach out to us!
