No one ever said it was easy. In fact, many people compare it to exercising because it requires consistency and discipline. I am talking about investing.
To their credit, investors today face the toughest environment to save and plan. Basically, people are not wired for investing. Investing is learned, and fear and greed were passed down through generations as survival instincts. Sadly, sometimes instincts can betray us.
They want us to sell high and buy low. They want us to panic during market corrections.
Disciplined investors, who invest early and often, do not allow emotions to dictate their behavior. Truth is, we are all disciplined in something, aren’t we? Whether it is in fitness training, the armed forces, the police, or when we were school age, we learned about discipline and how an undisciplined approach to just about anything in life could hinder rather than further us.
With Systematic Investing, You Must Have a Plan
First, you should adopt a long-term philosophy. Know a realistic rate of return to help you reach your goals and stick to it. This will dictate how your portfolio should look and how it should be structured.
For a 7 percent return, you’ll need a certain amount of equities and bonds over a period of time that would be commensurate with something in the area of 7 percent. For a 4 percent return, you have the luxury of being a bit more conservative. It is not uncommon for some individuals to know they can tolerate a bit more fluctuation month-to-month, week-to-week and day-to-day and not be overly concerned. They have trust in their advisor’s direction.
Being honest with oneself is important. When times are good, and the markets are good, we can all be a bit more bullish – or say we can tolerate a little more risk. You would almost have to put yourself in a particular scenario, like if the market dropped 20 percent, and ask, “Would I stay invested?” You might even open up to the idea of adding a bit of risk if you were 50 stocks and 50 bonds when the market dipped 20 percent. The portfolio is going to drift a bit more conservatively because the equity portion goes down, and it represents 45 percent of your portfolio.
So, adding 5 percent equities after the market dipped 20 percent would be a good thing – for discipline – to get you back to your normal allocation. Emotionally, well, that is hard to do. Sometimes, left to our own devices, we don’t have the time or the emotional inclination, to make clutch moves.
Working with your advisor on a regular basis can add value in the sense of rebalancing. You are not trying to time the market; you’re rebalancing your portfolio when you have moves that are larger than normal on both the upside and the downside. If the market has gone up 14-15 percent after six-months, you would want to trim some positions anyway. Your portfolio did well, and that’s great, but the byproduct is: it got riskier.
Risk Management is Part of Discipline
The equities became the larger part of the portfolio. So, risk management is part of the discipline and knowing at what rate of return. You have to have (1) a longer return that drives how the portfolio is constructed with regular rebalancing, and (2) a shorter return, remembering that markets are typically driven by corporate earnings and not by who is in the White House.
That’s not to say that policies do not affect the economy to some degree. They do. But most companies have a wonderful way of learning about the environment they are in. Once they know what they are dealing with, and there is some certainty, they can adapt very quickly, as they did during the COVID-19 pandemic. Companies are amazingly good at learning how to make money and how to make the world a better place.
Whether disciplined or undisciplined, the caveat is: today’s clients must feel they can place their trust in their advisor. At Hefren-Tillotson, we want to be our clients’ most trusted advisor. That is our number one goal. And obviously, we must help them reach their goals. If we can get that trust and confidence to the point where they rely on us, and they listen to our recommendations, they have a much better chance at being successful.
I had an individual who wanted to move all of his investments to cash. His frustration with the markets was driving him batty. About two or three weeks later, he admitted he was wrong. “I’ll fall on my sword with this one,” he said. Today, he is making up for lost ground and things are definitely looking better. Clearly, it was not the best time to move and we pointed that out to him. Discipline will help him recognize these times. He knew we needed to return to normal allocations to get to the longer-term returns.
Sometimes, it doesn’t feel good, short term, to add risk, or when the market is really high, to trim. It feels like “the trend is your friend,” and you want to ride with the winner and sell with the loser, and not add to it. But trust must be there. It is a process that takes time, perhaps a year or two. We earn that client-to-advisor trust, to see how things go, to get used to how the portfolio has been managed, and how recommendations are given.
Trust builds confidence when communication is there, especially in an environment like 2020, when it really pays off. There is so much information at our fingertips that it can actually hurt when a lack of discipline is present, and also tempt when someone wants to make unqualified movements because of what they heard in the media, the news outlets, and the 24/7 information age of the internet that we have all come to know.
None of these, however, will hinder us in our decision making process when working with you. If you need a second opinion, or would like to sit down with us to analyze your current situation, please contact me at 412-633-1671 today. I would be happy to talk with you.