3 STEPS TO EMOTION-PROOF PORTFOLIOS
It’s no secret to us that your investment returns represent more than just returns. You made investments to receive INCOME. This is a means to fund your dreams; the price must be worth it.
A few percentage points difference can mean you are either achieving a specific goal you set or letting go of it. Either way, you are emotionally invested in the cost of the experience.
Making emotionally motivated investments can mean selling low and buying high, which can have unintended consequences on your long-term investment returns.
STEP #1: HAVE A PLAN IN PLACE
Yes, we keep reiterating this point, and it’s bound to come up in the future again. The number one way to avoid emotionally driven investment decisions is by following an investment plan that is set in place.
Emotions around money often limit your focus on the present moment. A wealth manager can help you zoom out and relieve some of that short-term anxiety, especially during short-term market fluctuations.
Your wealth manager will be able to create a detailed plan to guide your buying and selling decisions while accounting for periods of volatility. Of course, minor tweaks may be made to take advantage of certain market conditions.
TIP #2: VOLATILITY IS OPPORTUNITY
A long-term plan will allow you to exploit opportunities during periods of volatility. What I mean is a market drop may allow you to purchase a stock that traded at $50 a short time ago for $25. This lowers your cost per share and helps improve your overall market return when the market rebounds.
Dollar-cost averaging is a great way to take advantage of lower prices without being influenced by emotion. This is the process of investing equal amounts at regular intervals. In other words, when you continue to invest regardless of an asset’s current share price, you purchase more shares when prices decrease and fewer shares when prices increase.
TIP #3: REBALANCE. REBALANCE. REBALANCE
Rebalancing is the process of realigning your portfolio’s blend of assets back to a target allocation when it drifts out of balance due to market movements.
For instance, if you own stocks and bonds. When stock prices drop, your portfolio will hold a smaller percentage of stocks than bonds. Using an opportunistic rebalancing strategy, we would sell a portion of your bond allocation to purchase stocks, which boosts your stock percentage back to your desired target. When a market upturn occurs, your portfolio would lead us to sell stocks and buy bonds within the portfolio.
Selling high and buying low reduces the risk of error often occurring with short-term moves.
At TMW Advisory, we believe a comprehensive plan is vital to helping you achieve your goals. Finding the right strategy for you and your financial goals is most important. If you would like assistance connecting the dots between your investment strategy and financial goals, schedule a call with a member of our TMW team.