Investing is for the long-term. Fantasy football–not so much. Over the years I have seen many an investor attempt to play the odds and hit the home-run in their portfolio. It is similar to fantasy football when you essentially set a “short-term” lineup based on expert tips to hopefully achieve a win. Your investment portfolio should have none of those characteristics. And just for the record, I love fantasy football. Just ask my wife. I have played in leagues for well over a decade now. I’m a die-hard fan of the NFL too. Needless to say, I know both sides really well.
With the recent global market volatility and the FED’s decision to leave rates unchanged (for now), I thought it apropos to address the importance of long-term investment planning. Longer time horizons allow for greater compounding in the portfolio which, to a degree, can offset portfolio volatility increasing return potential. Let’s take a look at the major themes that should be reflected in your investment portfolio to make sure it does not look like a short-term fantasy football lineup.
Theme #1: Focus on long-term sustainability of returns. Generally speaking, investment portfolios with the right mix of asset classes will rise over time. Therefore, it is crucial to pick the correct asset allocation when building the portfolio. Between you and your advisor, there should be some discussion about what asset classes have the best long-term reliability of returns. We all know that historical returns are no guarantee of future results, but historical returns typically do repeat if assets are held long enough. For example, if you hold equities or assets that perform like equities, we know that equity returns are driven by primarily by GDP growth. This is a long-term strategy though, which means that holding equities in a portfolio should be considered for those with longer time horizons (e.g. 6 years and beyond). Can shorter time horizons hold equities? Certainly, but the risk-reward tradeoff is much more volatile. There is some theory behind that particular holding period that is located here, if you are so inclined. TAKEAWAY: Having a longer return objective allows the power of compounding to work in your favor.
Theme #2: Focus on portfolio objectives. What is the portfolio designed to do? Capital appreciation? Income? Both? I think the best way (by far) to achieve portfolio objectives is to write them down. Like anything else in life, written goals have a better chance of being achieved. This starts with your investment policy statement. This document should clearly state what the portfolio is designed to do from multiple aspects including your risk tolerance along with your return objectives. It will keep your financial advisor accountable to the task at hand. It should be reviewed when your situation materially changes. TAKEAWAY: Having clear portfolio objectives allows you to focus better on what the portfolio is designed to do despite what may be currently happening in the global markets.
Theme #3: Focus on costs. I know this seems an odd interjection, but it is often overlooked although so critical. In my years as a financial consultant and advisor there have been some similarities with my participation in fantasy football. One of the most important as it relates to the issue of cost, is the fact that not many fantasy owners that over pay for a player win the championship. I will admit it can be done, but the odds are definitely against you. Taking it back to investing, the costs associated with managing your investment portfolio should be minimized. This not only includes what you pay your guy or gal (as a management fee), but also the costs associated with the strategy they implement. The strategy is important because of the costs that can be associated with portfolio turnover as it relates to tax liability. But, I’m getting ahead of myself. First off, know what you pay. Some costs that should be considered are the following:
- expense ratios in funds
- retirement plan administration fees
- annual account maintenance fees
- transaction costs (e.g. per trade costs)
- broker commissions and/or fund loads
- marketing fees (e.g. 12b-1 fees)
- there are more, just do your research before you invest.
TAKEAWAY: Whether you choose active or passive management, low cost ETFs or stocks, use a broker or a fiduciary, you need to be aware of how much of your investing dollars go to paying fees.
Investing should be considered a marathon, not a sprint. Leave the luck and chance to playing fantasy football!