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When staying the course doesn’t mean staying the same course.

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Choosing an Advisor Series. Part I. 

written by Brian Dudley, CFP®  Founder+COO

When should you stay the course?

A friend who recently visited our home (from six feet or more in distance) casually asked what they should do with their investments. It was a part of the “these times are crazy” conversations that I am sure all of you are having. As soon as the question was asked, and before I could answer, a follow up question of “I should just stay the course, right?” was asked.

Right. Well, maybe.

My response was “yes, if you have a long time until you will use those funds.” The conversation then quickly pivoted to other topics. It was a quick drive by, so not a time for deep analysis. As the weeks have gone by, I have seen so many tweets, LinkedIn articles or commentary, and articles through major online publications that address the topic of what to do. The takeaway from these is that it is hard to time the market and that staying invested is best for the everyday investor. True. If you miss the best days in the market, your returns suffer dramatically compared to the index long-term. Also true (however, if you happen to miss the best - but also the worst - days, your returns looking back beat the S&P over the past 25 years or so). These articles are abundant. The stats show that timing the market is almost impossible. So a quick, “Yes, if you have a long time until you will use those funds,” should suffice as an answer. 

But, does it?

Thinking about it now, no, it doesn’t. The better answer would have been, “Well, it depends on how you are invested.” Young investors shouldn’t just stay the course if the course you have is a bad or inappropriate investment strategy. Your strategy isn't right for you if it doesn’t align with what you want to achieve. This will ensure that your finances aren’t living their best life, and long-term, your financial plan will suffer. But what’s a bad investment strategy? It depends, really. If your investment lens is long, you will want to add assets that carry higher-risk characteristics for there is more upside potential in these assets. If you plan on using the funds in a year to buy a home, maybe a limited-risk or non-risk asset is a better choice. It also depends on how much risk you have an appetite for. If you can handle the short-term volatility of seeing your funds whipsaw (as we currently have in 2020), and not panic, you most likely understand the risk/reward ratio long-term. If you can't sleep because of what has happened, you probably shouldn't own risky assets, or, in my view, find an advisor to better educate you on why you are taking those risks which will help ease your investment anxiety and keep you invested long-term.

Let's look at  a few different asset categories and see what we consider at Pinnacle to be appropriate for longer term investment strategies and for those in the emerging wealth age group (20s, 30s, & 40s).

Are bonds the place to be? I don’t think so. With interest rates as low as they are, it's hard for me to say bonds are a great place to be long-term. The 30-year treasury is at 1.359%. That's a 1, folks.

Are target date funds a good investment strategy, then? No, not in my opinion. They aren’t customized to you. Your financial DNA is made when your money is intertwined with your goals and your values. A target date fund can’t do that.

How about an S&P 500 index? Yes, long term this is a better place to be. You may, however, be missing out on other opportunities such as tax loss harvesting in taxable accounts, aligning of your investments and your values, or actual ownership of a company in which you hold conviction, for examples. For full disclosure, I personally have held ETFs, or exchange traded funds, along with individual positions in the past. The ETFs offered me exposure to sectors without me picking individual positions inside of those sectors. I say "have" because currently, I now own just individual names inside of my retirement accounts.

Alternatives? There are many alternative categories. From commodities to private equity to merger arbitrage and beyond. True private equity may offer long-term upside without being tied to stocks (correlated) or bonds. There are definitely opportunities in this space. 

Individual stocks? As I stated above, my own retirement funds are invested in individual names. In addition, I don't own 50 different positions. I choose to own names I know and use, such as Amazon, Target, Netflix, Peloton (at IPO), Shopify, and eBay to name the larger known names. I also own some less known names which are tied to software and 5G technologies. I am aware that I am carrying more risk by owning a more focused portfolio. I am willing to accept the losses if they occur, as well. I don't day trade, it's not something I am good at, nor do I advise my clients to do that with our firm. Do I think individual stocks are good for the long term investor? Yes, but it should be a part of an overall financial plan. There are so many ways to do this, too. How and what that percentage looks like for you should be customized for you and your family.

How do you review positions and make sure that you are staying on the right course?

Hire a professional. Tom Brady has a throwing coach. Tiger Woods has a swing coach. Shouldn’t you have a financial coach? I am biased, but the answer is yes, but not just anyone.

Next up in the Choosing an Advisor series: When and how to hire an advisor.

Thanks for reading!