Markets have been pretty jumpy all year. Seems like we always get big moves in the daily prices. Maybe this has you thinking about updating your investments. But, what investments should you favor?
Human nature tells us to look for what has worked in the past and to hope that it continues. If you are not careful, you will select investments that have been great recently and hope they continue to be great. Behavioral finance experts call this recency bias. Humans tend to give more weight to recent events than they do to long-term trends.
As we think about your investment accounts, the risk of selecting new investments based on the results of the last few months, or even a year, is a bit like driving while watching the rearview mirror. It will cause accidents.
If you have researched investments you have seen or heard the disclaimer, “past performance is no indication of future results.” You might even believe it, but when push comes to shove what does your gut tell you? As you review a few choices of investments, you see one with really great results for the last year, and a second with VERY bad results in the last year, but a 10-year track record that is well above average. Which one feels right? The one with GREAT recent results. It’s human nature.
But remember, investments go in cycles. Markets grow for a time, top out, then fall for a time, then bottom out and then repeat the cycle. The timeframes change. The “causes” or triggers of the changes are different, but the cycle is the same.
That’s why I focus on client goals and priorities as we select investments. I especially focus on time frames in these conversations.
For Short-Term Goals. Like emergency money in case of some unexpected short-term need. I always recommend a savings account at your local bank. Preferably an account linked to your primary checkbook. This money is SAFE, EASY TO GET, and provides insurance so that you can get some money on short notice with no strings attached.
For Mid-Term Goals. For a big vacation trip next year, or maybe a child’s wedding in a year or two, I think a brokerage account with some short-term bond funds, some floating rate bond funds, and maybe a diversified income mutual fund, would be good. This mix will pay interest better than the savings account, but the daily prices of the investments can vary a bit. If you let the account compound for a year, or two you will do noticeably better than a savings account.
For Longer Goals. Maybe to save for a child’s college in 8 or 9 years, or a big remodeling project once the kids are out of college in 5 or 10 years. Invest in a mix of stocks and bonds. Maybe 60 to 70% stocks, some hedged equity funds, some bonds, and cash. This should grow 5% or 6% over five to 10 years.
For LONG-Term Goals. I’m talking about retirement or something you expect to start in 10 or 20 years. I like a mix of stocks. History shows that over a reasonable period, like 10 years, stocks outperform bonds and stocks outperform inflation. So this is the most reliable way to grow your money over a longer period.
Notice, I’m pretty general with these ideas. I tend to believe that simpler is better, wherever possible. Generally, low-cost baskets of lots of stocks or bonds, deliver better results over time.
Of course, the details of your situation are unique. So, if you want to talk in specifics about your investment accounts, I would be honored to visit with you. As a fiduciary financial planner, I’m always an advocate for my clients. I love talking with new people. Reach out and we can have a get-acquainted visit. Just follow this LINK to find a time that works for you.
Yes, I am a CERTIFIED FINANCIAL PLANNER™ professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.