There is no shortage of opinions pertaining to investing the right way. Depending on who you are, that advice on general investing strategies could very well be spot on — but that’s the problem. What qualifies as the “right” way to manage your finances has more to do with individual circumstances and willingness to tolerate risk than some sort of universally effective tactics.
Ultrahigh net worth individuals, for example, can act more aggressively with some of their investments than someone just starting to scratch the surface of retirement planning. The same is true for young investors, who are free to take on more risk because they usually have more time to recover if their investment portfolios decline in value.
Someone who is withdrawing a large percentage of their portfolio each year to fund living expenses, regardless of age, will have very different investment considerations than those described above. Heavily weighting one’s portfolio in something volatile like stocks is less advisable in this situation, because it could force an investor to withdraw money after a market downturn when stock prices are low and potentially undervalued. Meanwhile, someone with a steady income source should be able to ride out a correction more easily until the market rebounds and their investments recover and grow.
Because investing the right way is so dependent on where you are in life, it’s essential to realize that the “right” savings and investment tactics will continuously evolve as your circumstances change.
What Influences Your General Investment Strategies
Regardless of the current financial picture, the evolution of an investor’s personal financial status will play a significant role in their decision-making. Some of those elements include:
- Risk Tolerance: Personal financial status plays a significant role in each investor’s risk tolerance. Many factors can influence your ability to tolerate risk, including your net worth, spending habits, and age. Even if you have a healthy appetite for risk, your investment portfolio should shift to prioritize stability as you get older.
- Age: If you’ve ever looked up how much you should be saving based on your age, you probably noticed significant variances in the answer depending on the information source. That’s because there is no be-all and end-all way to save, although saving more money is better than saving less — and saving early is always better than saving too late. Making sound financial decisions requires you to take careful stock of your situation and develop a financial plan.
- Taxes: Are you in a high- or low-income tax bracket? How do you expect that to change in the coming years? Are you taking maximum advantage of the tax code to minimize your current and future tax burdens? Planning for taxes can help shield your assets from incurring unnecessary tax obligations that can hurt your investment returns.
- Net worth: As your net worth grows, you may notice more investment options available. Accredited investors can take advantage of alternative investments that aren’t available to non-accredited investors, such as private partnerships that invest in real estate or private equity.
- Children and dependents: If you have children or younger family members, you might want to consider saving some of your money in a tax-advantaged account specifically for education, such as a 529 plan.
- Expenses: All financial strategies should accommodate major future expenses, such as purchasing a home. Do your children have financial problems? Are you anticipating a divorce? These and many other personal considerations will impact your financial plan and investment strategy.
- Income: A steady source of income can change how you invest by allowing you more flexibility. The same is true of a significant one-time influx of capital from an inheritance or the sale of a business.
- Diversification: Regardless of your investing time frame, risk tolerance, and existing assets, diversification is crucial for any portfolio. Most investment portfolios should include an appropriate allocation to various asset classes that have a low correlation to one another.
If your goal is investing the right way, weigh the considerations above and decide how they fit into your overall financial picture and your priorities for the future. For more guidance on effective methods, contact Pekin Hardy Strauss Wealth Management to set up a consultation.
This commentary is prepared by Pekin Hardy Strauss, Inc. (dba “Pekin Hardy Strauss Wealth Management”, “Pekin Hardy”) for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any security. The information contained herein is neither investment advice nor a legal opinion. The views expressed are those of the authors as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy Strauss Inc. cannot assure that the strategies discussed herein will outperform any other investment strategy in the future. There are no assurances that any predicted results will actually occur. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee their accuracy.
