How to Choose an Investment Strategy
By Net Worth Advisory Group
We understand that you’d prefer to focus on your life rather than on managing your investments. Let our team relieve your burden by creating a portfolio suited to your goals and circumstances, and actively monitoring your investments, making adjustments as your life evolves.
Let’s dig deeper into finding an investment strategy that works for you, taking into account asset allocation, diversification, and security selection.
The first step is to determine the appropriate asset allocation for your needs. This involves a thorough understanding of your time horizon and risk tolerance. Since risk is inherent to all investing, this is a crucial step to get right.
Asset allocation is the general mix of stocks, bonds, and other asset classes that make up your overall investment portfolio. In general, stocks and mutual funds are considered riskier than other types of asset classes. But with higher risk comes the possibility of higher returns. Bonds, on the other hand, tend to offer more stability and are generally considered less risky than their equity counterparts. That’s not to say that bonds are risk-free, though. As we saw in 2022, the value of bonds can fluctuate greatly. While the day-to-day price may change, the coupon (or interest) payments are guaranteed as long as the company doesn’t default. This is what makes bonds appealing to clients who require fixed income. With bonds, we are able to build a portfolio of predictable, recurring income.
Finding the right combination of stocks and bonds is the crux of asset allocation, and a key factor to consider is the time horizon for withdrawal. The investor who plans to work for the next 30 years can withstand a greater degree of volatility in the short term in exchange for the possibility of higher long-term rewards. On the other hand, someone who is only five years away from retirement will more likely accept modest gains in exchange for stability. A common rule of thumb is to hold 110 minus your age in equities. So if you are 50, you would hold 110 - 50 = 60% equities.
The goal of our investment process is to hone in on your unique circumstances to develop a custom asset allocation for your needs.
Once we have the overall asset allocation identified, we move to diversification, which is an investing concept that can improve returns and reduce risk by spreading your funds across and within several different asset classes.
This doesn’t just mean diversifying between stocks and bonds, though. In fact, it’s not enough to concentrate your assets in just two positions and call it diversification. True diversification requires incorporating a mix of different types of investments like stocks, bonds, international investments, and real estate.
At Net Worth Advisory Group, we believe in diversifying across asset classes and within asset classes. For example, we diversify by market capitalization (small-, mid-, and large-cap), investment philosophy (value, growth, blend), and across market sectors. We diversify across short, intermediate, and long-term bonds, treasuries, corporates, and municipal bonds. By improving your exposure to many different asset classes, you can reduce the chances that any single investment will drastically alter the overall performance of your entire portfolio.
We’ve identified the broad mix of assets and the sub-classes that are necessary for diversification. Now, we move to actual security selection. This step involves thorough research.
Here are some of the factors we look at when identifying the best securities in each asset category:
- Stocks: We look for companies that have a strong track record of earnings growth and a competitive advantage in their industry. The company should be in good financial health with a strong management team and long-term growth prospects.
- Bonds: We look for bonds with high credit ratings. We also look at the interest rate and maturity date to make sure it fits with your investment goals.
- Mutual funds: Consider the fund’s investment objective, fees, and past performance. We look for funds that have a history of outperforming their benchmark and have experienced fund managers with a track record of success.
- Exchange-traded funds (ETFs): With ETFs, we want to invest in funds that have a low expense ratio, are diversified across multiple sectors, and have a good track record of performance.
Tying it All Together
Let’s imagine a couple of different scenarios. First, we have a nurse practitioner named Michelle. Michelle is 63 years old and still working full-time. She always imagined that she would work at least until age 70 because she loves caring for people. Recently, however, she has experienced a back injury that makes it difficult to continue working. She may need to retire earlier than expected and is not sure what to do with her 403(b) account.
Or consider Roger, a 55-year-old mechanic who divorced several years ago and shares custody of his two teenage sons with his ex-wife. Both parents contribute to the boys’ college fund, but Roger’s focus has been planning for retirement. He’s not sure he can retire at his dream age of 62. What type of strategy makes the most sense for each of these individuals?
The answer: it depends! Investment strategies are as unique as fingerprints, and the two hypothetical examples above are intended to give a brief picture of just how many factors can influence the available options when building a financial plan.
What’s your story? We want to understand your goals and your needs to help you find an investment strategy that works for you. Call us at 801-797-2833 or schedule a complimentary, no-obligation consultation to see if we are a good fit to help you pursue your goals.
To learn more, visit our website.
About Net Worth Advisory Group
Founded in 2003, Net Worth Advisory is an independent, fee-only, CERTIFIED FINANCIAL PLANNER™ and investment advisory firm located in Salt Lake City, Utah. We specialize in helping people transition from the workplace into retirement, and ensuring that those who are already retired will not outlive their nest egg. Our top priority is to have clients experience a greater sense of ease with diligent, personalized wealth care and the implementation of customized financial plans and ongoing personalized asset management. We equip all clients with a comprehensive financial plan, meeting every six months to update as needed and review investment performance. Our team is passionate about providing comprehensive financial planning with the fee-only model, and we love feeling like we’re making a difference in our clients’ financial lives.
As a NAPFA-registered fee-only advisory firm, our recommendations are untainted by a hidden agenda to sell financial products paying large commissions. Unlike our competitors at brokerage firms, insurance companies, and banks, we are compensated solely by our clients, so we are financially motivated to provide objective advice that is always in our clients’ best interests. Anyone can call himself or herself a financial planner, but only an advisor with the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation has met the education, examination, experience, and ethical requirements mandated by the CFP® board. Of the estimated 800,000 financial advisors in the U.S., only 55,000 have earned the CFP® designation. All Net Worth advisors are either CFP® professionals or CFP® professionals in training.
Net Worth Advisory’s mission is to significantly improve the lives of our clients by delivering exemplary financial planning and wealth management advice that enables them to live the lives they have imagined.