You’ve worked hard for your money. Your emotions are tied to it because of the sacrifices you’ve made to save this money to secure your future. That is why you feel as if you need to do something to preserve your wealth when you see several likely changes on the horizon. We potentially have a president who proposes to raise taxes on high-income individuals and corporations. We also have an undecided Congress with runoff elections in January, making tax planning difficult.
I’ve seen investors who bailed out of stocks and certain sectors before the election just because they were fearful of volatility. They also missed the sharp upswing that came right after the election, which no one saw coming. The market cannot be predicted even though it is run by humans with very human emotions. By the time herd mentality is detected, it is often too late to make a move.
I get it — it is a difficult position emotionally. But, if you have a financial plan in place, there is not likely a need for a lot of change. You don’t make sweeping changes to your financial plan or asset allocation based on thinking something might happen. You plan based on what you know.
I recommend a bottom-up approach for your asset allocation. First apply financial strength criteria to the stocks available for investment. Further narrow your options by looking at liquidity, growth, and relative value. Then look at an individual stock’s financials, business risk, market share, and growth prospects. Through this process, you can construct a portfolio that you believe will weather current and changing economic conditions. These are strategic choices designed to help you realize your long-term goals.
This differs from a top-down strategy that is influenced by current events, current market trends, and speculating on what would happen, what might happen, or what could happen. I believe a top-down approach puts investors at too much risk — especially those who are in retirement and depend on their investments to last.
Your strategy does not have to be dismissive of the current economic environment or government status. I recommend having a portion of your portfolio allocated to tactical moves that aim to take advantage of the current environment. You may consider Industrial companies that would stand to benefit from developments in infrastructure expansion as well as Energy and Utility companies that are poised to benefit from their renewable energy exposure. Just make sure you are considering companies that fit within your fundamental analysis. Look for financially strong companies that could be long-term investments — not speculations.
I may sound like a broken record, but for investors who have a plan in place and a set investment strategy, the best advice I can give is to rebalance your portfolio. Sectors like Technology and Healthcare may have outgrown their specified weights, which can add unnecessary risk should something shift in the broader market. Make sure your asset allocation is in line with your Investment Policy Statement, and remember to keep the money you need within the next 10 years for spending out of the stock market and in fixed-income investments that mature when you need the money.
No one cares about your money as much as you do, but following a plan and a set asset allocation designed for your unique situation can help take the emotion out of your investment decisions.