Appetites for risk and personal goals can vary, but there are a few common denominators when it comes to creating an appropriate investment strategy.
Adam Taback understands well the importance of planning for the future. Since 1993, the chief investment officer for The Private Bank has worked with dozens of high-net-worth and ultra-high-net-worth clients to help them develop strong investment portfolio strategies.
Although appetites for risk vary and personal goals can differ greatly, Taback does see some common denominators when it comes to the actions these investors take in order to create an appropriate investment strategy.
Like Taback, Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute, also has more than 20 years of investment industry experience. Together, they outline six of these actions and habits that all investors should keep in mind.
1. Create specific financial goals
To build a portfolio, begin by asking what you ultimately want to accomplish. “Ask yourself: ‘What’s my objective, and what would I like to do with my life?'” McMillion says. “The smartest thing you can do is start by knowing what you hope to achieve as an investor.”
From seeking potential income in retirement to passing along wealth to your children and grandchildren, knowing what you’re aiming for financially is crucial to determining the investment path to seek to get there.
2. Consult with an investment professional
Share your objectives with your investment professional and work together to create a plan to reach them. A detailed consultation requires you to be prepared with some specific knowledge. “Understand how soon you need access to money and whether you’re looking to generate growth or income from your investments,” advises McMillion. Armed with that background, your investment professional can evaluate scenarios for your investment plan, creating a portfolio that aligns your asset mix with your goals.” For example:
- Equities such as stocks can help provide potential growth opportunities over a long-term horizon.
- Fixed-income vehicles such as bonds can help provide a measure of stability.
- Real assets (for example, commodities and real estate) may help provide potential ongoing income and a hedge against inflation.
- Alternative investments (such as hedge funds and private equity) can help offset potential volatility.
3. Give your investment strategy regular tune-ups
Taback and McMillion say successful investors tailor their investment strategies to fit their personal tolerance for risk — and they have a clear understanding of the impacts on their portfolios. But they also revisit their risk tolerance on a regular basis to help make sure their investment strategy stays aligned.
Your risk tolerance is determined by factors including your investment goals and experience. Keep in mind that those objectives may change over time, as well, such as if your family grows or you’re starting to think more about charitable giving. Plus, milestones that come with reaching various stages of life can affect your investment strategy. “Don’t operate on a set-it-and-forget-it investment strategy,” Taback says. “Set and reset is a wiser approach.”
4. Keep an “all-weather” (diversified) portfolio
No one can predict what the markets will do or how events like state and local elections might impact the economy. But successful investors actively guard against potential risk by diversifying their portfolios, no matter their age, Taback says.
Diversification can help you limit your exposure and manage your liquidity — giving you the ability to address both current and future financial needs. Taback recommends considering maintaining some exposure to each of the four major asset classes mentioned above. That way, if one area underperforms, another may help balance it out.
5. Maintain a global range of investments
The U.S. represents only around 15% of global gross domestic product and 4% of the world’s population, says McMillion, who points out that international assets provide ample opportunities for growth — and successful investors are willing to look beyond the U.S. borders. “Domestic assets have performed better over the past few years, but many global assets are becoming increasingly well-priced, and many are paying higher dividends,” she notes. “Going forward, investors should consider looking beyond America’s borders for growth.”
Stick to a long-term plan, even in the face of uncertainty
Geopolitical and economic volatility can often lead to roller-coaster-like rises and dips in the market. But those events have done little to move the needle over longer time periods, says Taback, and successful investors know that they are often better served by embracing a more patient, long-term approach.
“Don’t focus on random calendar-year performance,” Taback says. “Rather than think of winning as a zero-sum game, look at it in terms of finding ways not to lose.” He adds that smart investing isn’t about being fixated on breaking headlines or trying to time the market. “It’s about building and maintaining a well-balanced portfolio that can help you reduce risk on the downside while also increasing opportunities to participate in growth,” he says, “potentially leading to markedly better results over time.”
Wells Fargo Wealth and Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
Past performance is not indicative of future results, and there is no assurance that any investment strategy will be successful. All investing involves risk, including the possible loss of principal.
Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. Investing in fixed-income securities involves certain risks, such as market risk, if sold prior to maturity and credit risk, especially if investing in high-yield bonds, which have lower ratings and are subject to greater volatility. All fixed-income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
Dividends are not guaranteed and are subject to change or elimination.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Alternative investments, such as hedge funds, private capital/private debt funds, and private real estate funds, are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of the U.S. securities laws. They are speculative, highly illiquid, and are designed for long-term investment and not as trading vehicles. There is no assurance that any investment strategy pursued by the Master Fund (and thus the Feeder Fund) will be successful or that the fund will achieve its intended objective. Investments in these funds entail significant risks, volatility, and capital loss, including the loss of the entire amount invested. They are intended for qualified, financially sophisticated investors who can bear the risks associated with these investments. Investors should read the fund’s offering documents prior to investing.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss, including in a declining market.
Scott Steinberg is an award-winning professional speaker and the author of "Make Change Work for You: 10 Ways to Future-Proof Yourself, Fearlessly Innovate, and Succeed Despite Uncertainty."