This is one of the most common questions asked by folks in the process of becoming new clients. There are two ‘industry standard’ answers to this question, and of course, our answer.
The first industry standard answer is to ask you (the new client) more questions. These are always insightful, on point, and completely relevant. Some examples:
Would you rather lose $20 or win $50? If your friend invested in XYZ fund and doubled her money in two months, and you invested in ABC fund and only gained 50% in one year, how would you feel? At what point would you panic – your account is down 10%, 20%, 50%, or 100%? What is your favorite color? Makes a lot of sense, right?
The second industry standard answer is better. This answer starts with your current balances, projected contributions until retirement, expected expenses in retirement, and calculates a necessary rate of return. We refer to this process as doing the math and it’s actually fairly helpful. Especially if you can accurately predict rates of return for the next 20 years and your precise expenses in retirement.
Then the process gets bizarre. Using computer models based on historic returns, applying Efficient Frontier Models with the Capital Asset Pricing Model feeding into a 10,000 iteration Monte Carlo Simulation, the model determines that the best course of action is a Strategic Growth with Income portfolio that will have an average annual return of 8.42% with a standard deviation of 9.72%. (numbers are completely made up for illustrative purposes only) If that’s too risky, you can chose the Moderate Growth Income Stability Low Volatility model with an average annual return of 7.48% and a standard deviation of just 8.16%. What? How? Well, that’s what the model says.
Confused yet? Me too. Drawing on my almost two decades of managing other people’s money, I’ve determined we can simplify the process down to just three investment portfolios. Ready? Here we go:
- When do you think you will spend this money?
- Now, Later, Not Sure
That’s it. Pretty simple. Everyone can understand the objective. Here’s some more detail.
Now – money we need to spend in the next 1 to 5 years. We invest in cash, short term bond funds, and target maturity bond ETFs. We are seeking return of principal, not growth.
Later – money we need to spend in 10 years or more. We invest in a long-term portfolio, mostly stock related mutual funds and ETFs, with some in fixed income for fun. This money has the potential to grow and while understanding that we could be negative for several years as the market ebbs and flows.
Not Sure – money we’re not sure about. Could be 3 years, could be 15 years. This bucket requires a bit more discussion, but our typical default is half in stock related investments and half in bond related. If you think you’ll need the money sooner, we hold more bonds. If later, more stocks. If you change your mind, we adjust.
Questions about how you are invested? Feel free to call or email and we’ll happily walk you through your investments from A to Z.
Required Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An increase in interest rates may cause the price of bond mutual funds and ETFs to decline.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
Mutual fund and stock investing involves risk, including possible loss of principal.