All too often, it is easy to make investment selections by piece parting different securities together. At Lighthouse Financial, we encourage our clients to look at their investment selections holistically. This means that when clients work with us to select investments, we are looking at the entirety of their financial picture, and determining how best to achieve their stated goals.
Holistic success can be accomplished by having a clear understanding of three fundamental components of our client’s wealth accumulation needs:
1. Investment Objectives
Investment objectives can be divided into two segments, 1) General, such as growth, income, or preservation, and 2) Specific, such as Long-Term Care needs, purchase of a home, retirement, or legacy desires. Specific goals allow for a focused and intentional approach to investing. It also provides reasoning for an investor’s decision toward growth, income, or preservation objectives. Lastly, specific goals, provide the opportunity to celebrate when the goals are achieved and can signify when assets can be redirected toward other needs.
2. Risk Tolerance
Risk tolerance is comprised of two elements, 1) the ability to take the risk, and 2) the willingness to take the risk. When people begin to invest, there is a sense of empowerment and excitement! However, when the chosen securities are not performing as intended, or the markets correct (dip 10%), the investor may find that he or she is suddenly not willing to take the risk (they go to all cash) or they are not able to maintain their portfolio through the risk (they sell low and buy high). A crucial role of an investment advisor is helping clients understand their true risk tolerance and adjust the portfolio accordingly.
3. Investment Time Horizon
Many investors do not consider their time horizon when selecting securities for their portfolio. However, research indicates that more risk of loss occurs in shorter investing horizons than for people looking to invest long-term. Therefore, the shorter time horizon creates a greater need for a conservative approach to the assets being invested. Understanding an individual’s time horizon for their investment portfolio is an essential component to selecting the appropriate strategy to reach desired goals within the needed timeframe.
Creating a Holistic Portfolio
It can be effortless to compartmentalize money—i.e., this is my play money vs. this is my savings. Unfortunately, this type of segregation may not provide the appropriate balance of assets, causing goals to be inadvertently missed. When deciding to invest, it may be helpful to answer these critical questions:
1. Why are you investing these assets?
2. What need is causing the desire to invest assets?
3. How much do you need the assets to grow, or how much income will you need from these assets now or in the future?
4. When the markets correct, are you able to sleep at night?
5. When a security loses money, do you panic or feel overly anxious?
6. When a security gains ground quickly, do you feel comfortable selling it during the upward trajectory?
7. Are you afraid to lose any money, even if it is for a short period of time?
8. How long do you anticipate investing the assets?
9. Considering your age and health, do you have an ability to keep the assets invested as long as you desire?
10. Are these assets to be used during your lifetime, or do you wish for these assets to pass down to another person or organization?
Once clients can answer these questions and identify these components, their goals help to drive their investment choices. In this decision-making process, it is crucial for investors to be honest with themselves regarding what they can do, and what they are willing to do. As advisors at Lighthouse Financial, it is not our goal to force our will on our clients, but to give them the tools they need to be honest with themselves, be realistic about their goals, and be educated about their decisions. At the end of the day, it is imperative that the investor feel comfortable with the decisions made in light of the resources provided. By partnering with Lighthouse Financial, investors have access to a broad range of information to better equip them for sound decision making-helping them accomplish their financial goals.
CFA Institute. What Every Investor Should Know. https://www.cfainstitute.org/learning/investor/Documents/defining_investment_objectives.pdf. Retrieved 2/14/2018.
Finra. The Reality of Investment Risk. http://www.finra.org/investors/reality-investment-risk. Retrieved 2/14/2018.
The Motley Fool. How Does Time Horizon Affect Your Investing? https://www.fool.com/knowledge-center/how-does-time-horizon-affect-your-investing.aspx. Retrieved 2/14/2018.