Getting Back to Basics: Part 1

Risk and Volatility are Not the Same

Part 1 of this month’s discussion will focus on risk vs. volatility. This month is the start of a new year and with a new year comes new beginnings and new opportunities to make the most out of your financial services team at (Company Name). We are getting back to basics this month. Join us for our month-long discussion.

Risk vs. Volatility

Understanding the difference between market volatility and market risk is a foundational skill for investors to obtain. Volatility can be described as how rapidly or severely the price of an investment may change, while risk can be described as the probability that an investment will result in permanent loss of capital.

When it comes to investing, risk and return go hand in hand. Investors like you get rewarded for taking on risks, but sometimes those risks result in losses. Losses can be permanent or temporary. Volatility is commonly used as a substitute for risk, but it is just one kind of risk investors can face. Other kinds of risks investors can face include counterparty, liquidity, credit, inflation, horizon, and longevity.

Volatility refers to dispersion of returns of an asset. In layman’s terms, it refers to the amount an asset’s price or value goes up and down. Volatility changes over time. These changes are generally gradual. Since no one has figured out a way to predict the future, we use historical volatility to indicate the likelihood of future volatility.

Liquidity is one type of risk investors may find themselves grappling with. Just because your investments are liquid, does not mean that their values are stable. This is where volatility can become a threat to your wealth. In the world of financial planning and investing, there can be what some would describe as moving targets.

In order to keep your head on straight during tough times, it helps to separate risk from volatility. They are not the same thing. Volatility in investing is often temporary, but it can bleed into risk if you do not know yourself as an investor. This is essentially because market volatility can become emotional. When you let your emotions into your investments and financial planning, it would be like transferring one problem in order to replace another. It is not sound planning.

This is where your financial planning team at (Company Name) can play a significant role in your life. We pride ourselves in creating financial plans and investment portfolios that work for you, your goals, and your level of comfort when it comes to market volatility and taking risks.

Stay tuned for part 2, where we will dive into diversification, asset allocation, and rebalancing!

Getting Back to Basics: Part 2

Diversification, Asset Allocation, and Rebalancing

Diversification

The practice of spreading money across different investments to reduce risk is known as diversification. By choosing the right group of investments, you can potentially limit your losses and reduce the fluctuation of your investment returns without sacrificing too much potential gain.

Asset Allocation

Asset allocation is important because it can have a significant impact on whether or not you will meet your financial goals. If enough risk is not included in your portfolio, your investments may not earn enough return. On the other side of the coin, if too much risk is included in your portfolio, the money needed for your financial goals may not be there when you need it. For this reason, it is important to meet with your financial team regularly in order to keep us abreast of your short-term and long-term financial goals, as well as to understand your investment style as you grow and learn as an investor. Determining the right asset allocation model for your financial goals can be complicated. Essentially, you are finding a mix of assets that have the greatest probability of meeting your goals while maintaining a level of risk you can live with.

Rebalancing

Rebalancing is bringing your portfolio back to your original allocation mix. This can be necessary because, over time, some of your investments may become out of alignment of your goals. Some investments grow faster than others. By rebalancing, you ensure that your portfolio doesn’t end up overemphasizing one or more categories. You want your portfolio to return to a comfortable level of risk.

Our Philosophy

Sometimes investors can get carried away in the newest, latest, or greatest idea which seems to be taking off in the market. Often, people want to put everything they’ve got in to one idea. This is what we’ll refer to as “mania”. We like to think of diversification as the antidote to mania. We never want you to own enough of any one idea to make a killing in it or be killed by it. Broad diversification is to spread a portfolio among disparate equity styles, sectors, and geographic theaters which historically will run on different styles. This practice allows us to somewhat suppress the overall volatility of a portfolio.

You can think of us as the lighthouse of your financial portfolio. Diversification, asset allocation, and regular rebalancing is our way of keeping the light on.

Whether you are just starting out, getting your feet wet, or have become a seasoned investor, our team at (Company Name) will work alongside you to create the most effective and efficient financial plans to meet your individual and growing needs. With the many seasons of life, come new and exciting financial goals. Meet with us today to maximize your portfolio.

Getting Back to Basics: Part 3

Money is Purchasing Power

What is Purchasing Power?

Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase. You lose purchasing power when prices go up and gain purchasing power when prices go down. We can’t talk about purchasing power without talking about inflation.

Inflation

Inflation changes the value of a currency over time. Many of us have had that time tested conversation with someone older than us from a different generation, which goes a little something like, “Back in my day…” And is usually followed by something like, “We could get ten pieces of candy for one nickel...” You get the idea. What a dollar, or a nickel for that matter, buys today is not the same as what it bought even just ten years ago. Although, with pricing increases, so has the federal minimum wage.

Inflation is tracked via the Consumer Price Index (CPI), which tracks the cost of a “basket” of a variety of goods and services. Each month, the U.S. Bureau of Labor Statistics (BLS) takes the average cost of the items in order to determine the change, over time.

What Does Purchasing Power Affect?

Purchasing power not only affects consumer goods and services, but it also impacts stock pricing. It can also affect the general health of the economy. Interest rates can also your purchasing power as an individual. Economists also compare purchasing power in The United States of America to that of other countries, looking at the same basket of goods in two separate countries and seeing how the U.S. dollar measures up in the other country, taking into account currency exchange rates.

How Does Purchasing Power Affect My Investments?

Rising inflation can corrode the purchasing power of your investments. Essentially the amount of money you invest can be worth less when you need it. For this reason, it is of utmost importance to focus on investments that will earn a rate of return greater than the value of rising inflation. When considering how purchasing power affects your retirement goals, it is important to remember that the only sane goal when it comes to retirement planning is to be able to maintain the purchasing power you have from day 1.

This is where your financial planning team at (Company Name) comes in! We work with you to ensure that you are in a portfolio that will uphold its purchasing power over time, standing up against inflation, but a risk level you are comfortable with. Your life and financial goals can change over time, make an appointment to meet with us today to ensure that you are on the right track to meet those goals and have the purchasing power you need when you need it!

Stay tuned for part 4, where we will dive into market timing madness!

Getting Back to Basics: Part 4

Market Timing Madness

What is Market Timing?

Market timing is the strategy of making buying or selling decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.

The Madness of Market Timing

In reality, no one can predict the future. Common wisdom of today tells us that attempting to time the market does not really work. As hard as many investors have tried, earning immense profit by attempting to buy and sell around future market pricing is a concept which can be described as elusive, at best. However, some investors can profit from making smaller, reactive choices in investing based on market timing. One of the greatest costs of market timing is being out when the market unexpectedly rises upwards and being in during an unexpected drop. Attempting to “beat the market” tends to be a futile endeavor. At best, an investor can make significantly more gains by focusing on time in the market rather than focusing on market timing.

Focus on Time in the Market

While it is true that market timing can sometimes appear to be a beneficial strategy, disappointment in the results is inevitable. It is comparable to sports commentators attempting to predict which team will be the big winners at the beginning of a season, only to be proved incorrect when their chosen teams ultimately lose in the end. For those investors who do not wish to subject their money and assets to such a high-risk strategy, time in the market can be considered a good alternative to market timing.

Buying and holding does not equate to ignoring your investments. Regularly evaluating your portfolio with your financial advisement team is always necessary because the market changes over time. A regular investment portfolio check-up, say annually, will ensure that you are making the right decisions and that your money is exactly where it should be to reach your financial goals.

Time, not timing, is your friend. The most effective approach in reaching your financial goals is to seek information, ask questions to your financial advisement team, and make decisions with the experts at your side. Above all else, your short-term and long-term decisions should reflect your individual financial needs and goals. You have to decide what level of risk you are comfortable and capable of living with now and in the future. Going over your portfolio with your financial team here at (Company Name) regularly will help you determine what investments will prove to be the right ones for you.

Thank you for joining us in our month-long discussion of “Getting Back to Basics”. Sometimes seasoned investors tend to think that they know it all or that they can beat the market by predicting the future because of their level of experience. Dialing it back and looking at the basics can help to center you and allow you to make informed decisions in your portfolio and investment strategies.