Chances are, you’ve accumulated various investments over the years in a piecemeal fashion, with new investments made as you had the money. When your investment portfolio was smaller, this strategy was understandable and not overly harmful; but this reality does not lend itself to larger portfolios.
Having a cohesive plan sounds great, but if it can’t withstand market volatility and an unlimited number of factors that impact the markets every day, then chances are you won’t stick with the plan. A durable investment plan is one that can weather any ‘investment storm’ and allow us to stay the course toward our goals.
If you’ve been able to amass significant assets, now is the time to revisit the key factors that will lead to a durable plan.
Time for Financial Planning
Your time horizon, in terms of both accessing your investments and the need for longevity of your assets, is a critical factor when building a durable investment plan. If your time horizon for accessing most of your funds is less than three years, then it makes sense to avoid riskier investments like stocks. If you have a 30+ year life expectancy and need your assets to persist at least as long as you do, then this factor must be accounted for when building your portfolio.
Truly understanding your tolerance for risk is paramount to building your investment plan. When markets go down significantly, you need to have an investment plan that gives you the confidence to stay the course and not panic. Conversely, if you’re trying to temper market downturns you need to be willing to forego some upside opportunity when markets go up. Your investment plan should account for both scenarios in advance and be tied directly to your tolerance for volatility.
Income Needs & Longevity
If you are at or near retirement, you have a twofold need for both income from your portfolio and longevity of assets. A durable investment plan will account for both of these needs and be able to function in up and down markets. Referring back to Asset Allocation, you’ll need to allocate enough conservative assets in your portfolio to provide stability and income, and enough growth assets to provide for your longevity.
Having a mix of different investments provides more consistent returns from year to year. If some investments within your portfolio are doing poorly in a given year, it’s important to always have other investments that are stable or growing. The proper mixture of stocks – bonds – international – real estate – cash is a critical component of every durable investment plan.
Taxes & Householding
An investment plan will last longer if it’s invested in a tax efficient manner, which is accomplished a few different ways. First, favoring tax efficient securities like ETFs, relative to mutual funds, provides more tax control, as ETFs do not generate unwanted year-end capital gain distributions. In addition, placing more tax efficient assets in brokerage accounts (equities) and less tax efficient investments (bonds) in tax deferred accounts (IRAs) provide greater tax control and extends the life of your assets.
Rebalancing a Portfolio
Rebalancing a portfolio, which is the discipline of selling some of your winners and buying more of your laggards, will reduce overall portfolio volatility and lead to more durable investment portfolios. Related to householding, the investment discipline of rebalancing can be done more tax efficiently if it’s coordinated across your multiple accounts.
A durable investment plan is one that can weather any ‘investment storm’ and allow us to stay the course toward our goals. Coordinating your time horizon, risk tolerance, and income needs will lead us to an appropriate asset allocation. Once accomplished, monitoring your taxes and rebalancing towards your target asset allocation will keep you on track.