We live in uncertain times. The pandemic has fueled challenges in all aspects of life, including family dynamics, health, finances, and societal stability. With the wide range of concerns you may be confronted with, it’s tempting to get swept up in the frenzy, scrambling to control all of the variables, only to realize that there is very little control to be had.
So what can you do?
I believe the most effective strategy is to identify the things that truly matter in your life and the things you genuinely have control over. The intersection of those two things is where you should focus your time and energy.
How to Start Feeling Like You’re in Control of Your Finances
Achieving a sense of well-being and control over your financial future may feel particularly difficult during times of widespread volatility, but it can be done.
When I meet with a new client who is troubled about the current financial climate, I first endeavor to let them know that their concerns are valid. But then I like to shift attention from the things that make them feel powerless to the myriad of things that they can, in fact, control.
I offer my clients the following suggestions to help overcome the fiscal and mental obstacles to pursuing financial wellbeing and building the investment portfolio to support it.
- Develop an investment strategy aligned with your goals, values, and current circumstances—let this strategy guide you through market stability and volatility.
- Assess your risk tolerance and use risk management strategies like asset allocation and diversification.
- Be aware of media consumption—only listen to quality sources in healthy quantities.
- Create a strategy to manage your expectations, hopes, fears, and motivations.
- Practice ways to control emotional reactivity to outside events so you can make sound financial decisions with your long-term goals in mind.
By implementing these tips, you’ll be taking control of your emotions and reactions to the things you can’t control. And when it comes down it, being able to control your emotions and reactions is a really important piece of financial stability.
Knowing What is Within Your Control As An Investor
Investing to work toward long-term financial objectives comes with inherent risk. While there is no way to eliminate the possibility of loss entirely, it’s well within your control as an investor to mitigate the possibility of catastrophic loss. To do this, you need to assess your risk profile and build a well-balanced portfolio based on that profile.
Determining Your Risk Profile
There is good risk and there is bad risk, but what falls into each category depends largely on the risk tolerance of the individual investor. Determining the appropriate risk profile your portfolio should bear depends on considerations such as time horizons, annual income, and how much money you can stand to lose if an investment doesn’t perform as you’d hoped.
A good investment for someone with a 20-year timeline and $2M of available capital is unlikely to be appropriate for an investor with a five-year timeline and $250k. Where the former may opt for higher risk investments in hopes of higher returns, the latter individual may benefit from an approach with higher risk aversion. But again, there are other factors that would determine each individual’s appropriate risk profile.
Working with a financial advisor can help you to accurately assess your risk tolerance. Annual reviews are important because things do change and adjustments should be made to meet evolving needs. Plus, a financial advisor can provide you with focused ways to understand your unique risk profile.
Asset Allocation
Asset allocation refers to how your portfolio is broken down into different asset classes such as stocks, bonds, real estate, or cash. A portfolio that is heavily weighted in one particular asset class could expose you to substantial loss should that sector experience an adverse event.
For investors with higher risk tolerance, this may be a sound strategy if, for instance, aggressive growth is the objective and the overweight allocation could result in higher returns. Conversely, risk-averse individuals may benefit from a more balanced asset allocation strategy. Dividing your portfolio equally among lower- to medium-risk investments can minimize the likelihood of significant loss, but may also produce lesser returns.
As investments grow, it’s important to stay in the habit of rebalancing positions in your portfolio to maintain the asset allocation you originally set. Some experts suggest you rebalance your portfolio every six months to a year, while others prefer a percentage-based approach. For instance, if your asset allocation strategy specified 25% of your portfolio be invested in stocks, then a rebalancing should occur if your stock holdings reach 30%.
No investor or financial advisor can control systematic risk factors such as inflation, geopolitical events, or interest rate hikes that inevitably impact the performance of investment portfolios. But determining an appropriate asset allocation according to your risk profile is something you can control to mitigate the impact of overarching economic and industry factors.
Diversification
Diversification within each asset class held in your portfolio is a strategy to further manage risk while helping you to pursue stable returns. If you allocate 20% of your portfolio to stocks, you want to diversify your holdings in a range of stocks rather than in one single company or industry sector. Investing in companies within different industries or geographic locations can further reduce the likelihood that all of your stocks will lose value simultaneously.
For instance, if in March of 2020 you were invested entirely in airline stocks, that entire portion of your portfolio would have plummeted. On the other hand, if you were invested in stocks from a range of industries such as air travel, information technology, and consumer staples, your overall portfolio may not have experienced too much loss. You may have seen a dip in your airline stock valuations but an uptick in the other two, balancing out your loss or possibly even resulting in a gain. This example illustrates the power of appropriate diversification.
Have Support in Place
The way in which you manage your emotions relative to the ups and downs of the financial climate is a significant predictor of investor success and fortunately, is within your control. Your ability to control your emotional reaction to market fluctuations and general volatility will influence your ability to make sound, coherent decisions.
“Buy low, sell high” is a well known phrase in the investment world, but all too often, investors do the opposite without even realizing it. It’s tempting to follow the latest hot stock tip or succumb to the fear associated with market swings, which is what makes emotional intelligence a key factor in becoming a successful investor.
An investment advisor whose philosophy is in alignment with yours can help to fortify your resolve in challenging financial times. When market turmoil occurs, your trusted advisor can make the difference between keeping a level head or making a hasty decision you’ll later regret.
Partner With Caviness Wealth Management For Comprehensive Financial Life Planning
At Caviness Wealth Management, we learn about our clients’ goals, values, circumstances, and personal characteristics to create an appropriate, customized investment strategy. We do not believe in a one-size-fits-all approach, nor do we believe in trying to time the market. Instead, we help our clients build an investment strategy tailored to their individual risk profile.
If you want to focus more on the things you can control during times of volatility, Caviness Wealth Management may be the firm to help. To learn more about our approach to long-term, goals-based financial planning and investing click here to schedule a free, no-obligation conversation today.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
Asset allocation does not ensure a profit or protect against a loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
