With so many opinions, theories, books, and products to choose from, what are the initial steps to developing a sound investment plan? The answer is fundamental to your investment success. The key to any investment plan is either finding the time, learning the skills, setting aside emotions, and designing and monitoring your portfolio, or developing a trusted relationship with a qualified financial advisor who can help you. Regardless of if you are managing your own investments or using the help of a professional, let’s look at three time-tested investment strategies.
Start with your goals
The best investment strategy always starts with your goals in mind. Since your investments are the means to fund those goals, to be a good steward of your investment assets, you need to identify the time horizon of your goal and how much risk you personally are willing to take.
In general, the longer your investment time horizon, the more risk you can take. For example, if your goal is to retire in 30 years and your life expectancy is 60 years, you may still be able to afford to take risks with your investments. On the other hand, if your goal is to pay for your child’s college education and they are heading off to school in a couple of months, you probably don’t want to take much, if any, risk with this part of your portfolio.
Develop a sound asset allocation strategy
We believe asset allocation is the foundation upon which sound investment management and true diversification are built. Asset allocation is the process by which you spread your investment assets into various asset classes (such as stocks, bonds, alternatives, and cash) to maximize your returns while attempting to limit your risk based on the level of risk you are willing to accept.
Also, consider using a combination of active and passive management styles. Active vs. passive is an ongoing debate among financial advisors. Passive investors limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest. An example is an investment in the S&P 500 Index. Alternatively, active investing requires that someone act in the role of portfolio manager to attempt to beat the stock market’s returns. It involves a much deeper analysis of when to buy or sell a stock, bond, or another asset.
The battle between which is better, active or passive, has been waging in the investment world for some time. We believe some sectors of the market are efficient, and using low-cost, passively managed investments may make sense. While other sectors of the market are not as efficient, thereby active management may be more appropriate. In other words, at Williams Asset Management we believe the sweet spot is using both strategies when building a diversified portfolio.
Consider alternative investments
Alternative investing involves investing in asset classes other than stocks, bonds, and cash. Examples of alternative investments are products such as real estate, currency, commodities, and private equity. However, alternatives can also be strategies (as opposed to products) such as long/short, market neutral, event driven, and managed futures.
In the current market climate of near all-time highs in U.S. equities, and the forecasted rising interest rate environment, investors may find themselves restless as they are wondering how to best protect their retirement nest egg. Since the traditional approach to a diversified portfolio maintains exposure to stocks and bonds, and we are in a climate where both have the potential to go down simultaneously, it becomes increasingly important to vet out strategies that might not be correlated with the broader stock and bond market -- this may help increase diversification in an overall portfolio.
Alternative investments may offer said diversification; however, they do not come without their risks. A high degree of due diligence is warranted for identifying, selecting, and monitoring these types of investments.
Invest with trusted financial advisors in Howard County
At the end of the day, the best investment strategy will be the one that works well for you and suits your individual needs. If you would like advice on which investment strategy will work best for you, let the CERTIFIED FINANCIAL PLANNER™ professionals at Williams Asset Management help with your wealth management needs. Whether you need comprehensive and holistic financial planning or investment management, we can help! We are fee-based, independent financial advisors located in Columbia, the heart of Howard County, Maryland. Schedule your complimentary consultation today by calling (410) 740-0220!
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