The Art of Long-Term Investing

Do these concerns sound familiar?

·       “The economy is slowing!”

·       “We may be entering into a global recession!”

·       “What if there is another global crisis?”

·       “The stock market might crash!”

·       “Is the market too volatile for investors like me?”

·       “What if inflation never goes away?”

·       “When will there be another correction?”

·       “What is the best time to enter the stock market?”

If thoughts like these weigh on your mind, then you are not alone. However, over the next six months, you must keep in mind that difficult periods in the economy can create the best opportunities for investments.  Financial markets are, by nature, surrounded by unknows.  That creates fear around investing, especially because the financial security is integral to our well-being.  Investor emotions not only can be hazardous to your financial health, they also feed market volatility.

 

What does it meant to be a long-term investor and how can my advisory team help?

The growing knowledge of Behavioral Finance defines the many biases that affect our ability to make good investment decisions when self-investing.  These biases include:

• Anchoring, or becoming attached to preconceived notions.
• Recency Bias in which you favor recent news or performance over the bigger picture.
• Confirmation Bias meaning you take information that reinforces your preconceived notions more seriously than data that contradicts it.
• Loss Aversion which indicates that as an investor you are twice as sensitive to losses as you are to gains.  This is one the most harmful emotions that negatively affects individual investors.

A good advisory team will offer attentive oversight of your investment portfolio with a disciplined strategy, including focusing on long-term goals while adjusting to macro market conditions and changing needs.  A great team of advisors will help you become a long-term investor by preventing you from making the most common psycho-emotional errors.  A great team, one that will have he most impact on you and the lives of your family, will help you stay focused on overall goals and objectives.

At this particular time, perhaps some adjustments in your portfolio are in order.  For example, based on your time horizon and potential income needs, you might think about re-balancing over the next several quarters.   Of course, it is essential to keep tax considerations in mind as you rebalance to maintain targeted asset allocations.

 

To address your long-term goals, you need an asset class that will keep up with or exceed taxes and inflation to fund objectives that could include retirement income, philanthropy, or legacy plans.  To do this effectively, one cannot abandon equities.  The key is to have realistic expectations for the performance of your assets and to work with your advisor on a comprehensive financial plan that includes adequate insurance, estate planning, tax strategy and cash flow analysis.

 

Be a long-term investor

In times of uncertainty, it is most essential to have a plan, and especially, to stick with that plan.  Many individuals who self-direct their portfolios make the mistake of selling when asset prices are depressed and buying when asset prices are soaring. A good financial advisor can help you set a portfolio that matches your risk parameters at the outset, and then stick with that plan through the difficult times. It is impossible to predict the future, therefore impossible to call market tops and bottoms.  Therefore the key is to develop the right asset allocation for you and stick with it.  This is where a good financial advisor can deliver substantial value to any investor.  Use this time-tested approach to maintain calm and consistency amid market change and complexity.  This will allow you to move beyond short term emotional constraints and help you focus on the quality of your life supported by your growing financial assets.

 

Possible Action Steps

Meet with your financial advisor to review your goals, objectives and plans.  Consider possible rebalancing or other adjustments, especially if your objectives and time horizon have changed.  For example, if you are nearing retirement or have other needs for drawing upon your savings in the next couple of years, consider dialing up your fixed income allocation.  If you are in a high tax bracket, the best quality municipal bonds will always provide a measure of certainty in any portfolio while providing tax efficiency.  A few other steps to consider:

• Ask your financial advisor to run cash flow scenarios to estimate the potential retirement income versus spending objectives.
• Review your most recent tax return with your Financial Advisor and CPA to explore potential tax reduction strategies.  If you are self-employed, have you considered a Cash Banace Defined Benefit Plan?
• Discuss whether you are adequately insured against unexpected loss of income, health, life, assets or potential unfunded estate tax liability.

 

Everyone has questions about money … what are yours?  Let’s have a conversation.

 

Benn Feltheimer, CRPC® 

Managing Partner 

Feltheimer Cohn & Associates 

53 W. Jackson Blvd.  Suite 556 

Chicago, Illinois 60604 

Phone:  312 663 5001 

Fax:  312 663 5009