Keeping Your Financial Plan Aligned With Your Goals in Today’s Market Environment
James V. Petitpren, II
The extreme market volatility of the past months has left many investors wondering how their investment portfolios have held up during 2020’s rollercoaster ride. We believe that rather than just thinking about the status of your investment portfolios relative to certain short-term equity or fixed income benchmarks, investors should remain focused on the long-term rate of return which will drive their progress toward achieving their long-term goals.
While the market volatility of 2020 has been remarkable, valuations and capital markets assumptions are always evolving. Your goals and family situation may be changing as well. That is why is it so important to meet with your advisor regularly to revisit your overall financial plan and ensure that it remains aligned with your long-term goals.
Related Read: Four Reasons for the Return of Market Volatility
In this blog, we identify five principles of our planning and investment process that we reinforce during conversations with clients to review their financial plans.
This highlights a key reason to review your financial plan with your advisor every year: Your advisor needs to be aware of these changes so that your financial plan and your portfolio will be in step with what you want to accomplish with your wealth.
Disciplined rebalancing naturally leads investors to buy into weakness and trim into strength. For example, assume a portfolio is intended to have 65% in equities, 30% in bonds and 5% in cash, and markets move so that equities are now 60% and bonds are 35% of the total. Disciplined rebalancing will sell some of the bonds that have risen in value to buy more equities at an attractive price. This helps investors to avoid the dual traps of fear and greed and benefit from the market’s ups and downs over time.
In reality, it is the total return a portfolio generates that matters, not the source of that return. Whether a $1 million portfolio generates a 5% return from interest and dividends or the securities in the portfolio increase in value by 5% net of taxes and fees, the return is the same in both cases. This focus on total return, rather than yield, leads to better decisions that are consistent with long-term investment goals.
Related Read: Investment Challenges of the Affluent Investor
It is important to realize that a permanent loss of capital does not occur unless an investor sells an asset before its value has recovered. The V-shaped downturn and subsequent recovery of equity markets from February to July of 2020 — the starkest example of volatility in our lifetimes — illustrates the importance of remaining invested through times of heightened volatility. Staying focused on long-term goals and remaining committed to the plan helps investors manage risk, rather than reacting to the historical temporary nature of volatility.
Investors might also consider alternatives such as private equity, private real estate, private credit, real assets (e.g., timber and farmland) and gold. In addition to offering potentially attractive returns, these asset classes can provide important diversification to a portfolio that is heavily concentrated in equities. Of course, it is essential to understand the risk and liquidity characteristics of each asset class and how it fits into one’s portfolio before investing.
Meeting with your ORBA wealth advisor at least once a year is valuable in any environment. But it is especially important given the changes in market conditions and capital markets assumptions that have occurred in 2020.
For more information, contact James Petitpren, II at [email protected] or 312.670.7444, or visit ORBAWealthAdvisors.com.
One response to “Keeping Your Financial Plan Aligned With Your Goals in Today’s Market Environment”
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Financial planning is really important to consider and must be prioritize in many aspects. Great content you shared.