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Are You Your Portfolio's Greatest Risk?

Published in Articles on May 15, 2017


We all want peace of mind with our financial future. The problem is, we live in a world filled with uncertainty. What will President Trump do? How will it affect stock prices? Will the market go up or down? When (not if) will the next crash be? One thing we do know with certainty is that markets have been, are and will continue to be volatile. Even though markets will continue to be unpredictable, your retirement plan does not have to be.


Most people have two problems when it comes to their retirement plan. First, they do not have one. Second, if they have one, they do not follow it. In both cases, the problem is something you can control—the problem is you. This is a new year, and it is time to tackle both of these challenges.


First, you need a written plan with a well-thought-out strategy. Julie in our office always reminds us, “If it’s not on the list, it doesn’t exist.” You can do it yourself or find an advisor, but you must get a written plan. Start with short-term (1 to 10 years) goals and fund these with short-term assets. This would include bank savings, certificates of deposit (CDs) and high-quality, short-term bonds. Next, look at your long-term goals and fund them with long-term assets, such as stocks and real estate investment trusts (REITs). Do not confuse these two parts of your plan. Never fund short-term goals with long-term assets or vice versa.


Second, stick to your plan. To do this, you must have confidence in your strategy. Make sure your strategy is built on the sound and proven science of long-term investing. This is where discipline comes in. Research in behavioral finance has shown most people’s financial plans do not work—not because the plan was bad but because they failed to follow it. In other words, you are the greatest risk to the success of your own plan.


To control this risk, we need to understand that our decisions are driven by our emotions. This is what makes us human, but it can also cause us problems when we start changing our strategy based on our “gut feeling.” Fear is an understandable emotion of extreme volatility in the market. The problem is when we let short-term emotions control our long-term decisions. Study after study has shown that the more volatile markets become (both high and low), the more irrational people’s decisions become. That is why a written plan is so important.


When markets go crazy (both up and down), before you do anything, look at your plan first. What did you plan to do when markets dropped? I hope rebalance, not sell. This is how institutional investors manage investment portfolios. It is why the rich get richer and the average investor underperforms in the market and thinks it is a rigged game.


The next time bad news fills the airwaves and the markets drop, before you sell, ask yourself one question: “If I’m selling based on fear, who is buying and why?” After you have a plan and follow it through a few market cycles, you will see that it works. This builds your confidence and helps you stop worrying about the things you cannot control and what will happen next. Then you are focused on what you can control, and you gain the peace of mind you are seeking.


Kenneth J. Simpson is a financial advisor with Onyx Financial Advisors, LLC, an independent fee-only registered investment advisor firm located in Idaho Falls, Idaho. He can be reached at (208) 522-6400 or at www.OnyxFinancial.com.