Markets and portfolios move up and down — but does it really matter? As we close in on the midpoint of 2022, we have seen one of the most volatile starts going all the way back to 1939.
The question people often ask is, “What’s going to happen?” Ultimately, we believe that’s the wrong question. The more important question is, “Is what’s going to happen going to affect me and my ability to meet my lifestyle?”
Why are you investing? Is it to beat an index or to achieve a personal goal? Is it to select the newest investment or to live your dream? Most of us are investing to achieve a personal goal or fulfill a need such as having retirement income, funding education, going on a vacation, or remodeling a home.
As we face volatile markets, portfolio fluctuations and dire news, we often focus on the value of our accounts, not the value they bring. If we can meet our goals today and tomorrow, then the absolute numbers really don’t matter.
Focus on Your Vision, Not on Market Performance
The most important benchmark is whether you can maintain and enhance your standard of living, not some market index. Performance should focus on your needs, wants and vision — not a random number or value. Markets will go up and down, but don’t focus on that — focus on your personal vision.
As broader markets have set record new highs, many investors are comparing the performance of their portfolios against various market indexes. In most cases, people’s portfolios do not contain the same investments as the index they are comparing them to, so the comparison is irrelevant. When markets correct and portfolio values drop, people are naturally concerned they are losing money. Again, the most important factor is whether you can meet your goals today and in the future. Shorter-term performance is irrelevant.
Asset allocation is the practice of mixing non-correlating assets together to find an optimal balance of risk and return based on your investment profile. The idea is to minimize your portfolio risk while maximizing your returns. In contrast, asset selection, or securities selection, is the practice of building your portfolio with a variety of investments that align with your asset- allocation strategy.
Studies have shown that asset allocation can account for more than 90 percent of your return.
We agree that asset allocation — not investment selection — is the most important factor in determining your investment success. We have a rigorous process for screening, selecting and monitoring investments. That is the science; developing an allocation and broad plan based on your personal goals, vision and needs is the art.
One of the worst things investors can do is to try to time markets. Chasing past performance or making decisions based on emotions has led to significantly reduced returns for many people. This is why the average equity mutual fund investor underperforms the average fund by about 40 percent over 20-year periods, according to Nick Murray Interactive.
DALBAR, a financial services research firm, studies the timing of mutual fund flows to determine how emotions impact investment decisions. The finding is that “Most investors are bad at market timing but try to do it anyway.” The “average investor” has underperformed a basic, indexed 60/40 portfolio by 3.5 percent annualized. On a $100,000 initial investment from the start of 2001 through the end of 2020, that adds up to nearly $170,000 of missed gains.
When market volatility tempts you to bail out, consider this fact. In the past 20 years, seven of the best days in the market happened within just about two weeks of the 10 worst days. Your best strategy is to stay in the market and focus on the long term. Again, shorter-term performance is irrelevant.
While many firms focus on selling the latest investment or trying to beat a benchmark, we focus on you and achieving your vision. Rather than taking an investment-centric approach that looks at the portfolio and tries to determine how your life can be, we want to understand what your personal vision is for the future and then develop a holistic plan to achieve it. The investments themselves are simply a means to an end. We call this Personal Vision Planning®.
Focusing on your long-term vision can help you avoid making costly knee-jerk decisions based on emotion.
Regardless of what transpires, we are here for you. We want to understand what’s important to you and plan accordingly. Ultimately, most people are investing to meet personal goals and needs. Your vision is our priority, and your success is our passion.
Randy Carver, CRPC®, CDFA®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc. was established in 1990 and is one of the largest independent financial services offices in the country, managing $2.2 billion in assets for clients globally, as of December 2021. Randy and his team work with individuals who are in financial transition as a result of divorce, retirement or the sale of a business. You may reach Randy at email@example.com.
The information contained in this post does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.
Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy, including asset allocation or diversification can guarantee your objectives will be met. Prior to making an investment decision, please consult with your financial advisor about your individual situation.