What’s Your North Star? The Compass For Your Investment Plan.

The answers to these questions can uncover the North Star to guide you toward an investment plan that’s right for you.

 

by John Eberle, CFA® 

One day, the market is at an all-time high. The next day, the Dow loses hundreds of points. Not more than a week later, the markets spring upward and are acting like that last drop never happened.

What’s going on here amid all this volatility? And what impact could it have on your investment plan?

Well, for one, phases of volatility are the nature of the beast that is the stock market. If you’re a long-term investor (as many are), volatility is one aspect that you’ll have to ride out at one point or another. How do you do that?

You find your North Star – the discipline to stay on course with a long-term investment strategy based on the goals you’ve always planned. Even as markets shift.

What’s important for what you want to achieve for you and your family in 10, 20, 30 years? Does the current mix of assets in your portfolio reflect those goals as well as the amount of risk you want to take on along the way? What further actions are required for you to reach your most important financial destinations on time, like retirement? The answers to these questions can uncover the North Star to guide you on a direction for an investment plan that’s right for you.

We actually happen to have a financial North Star ourselves at Fiduciary Financial Partners. It’s a philosophy that often guides us on the investments we make on the client’s behalf. Like practically every investor, there have been times when that philosophy has been tested by the market. Yet we’ve always successfully emerged from that roller coaster because we stayed steady and true to a long-term perspective on an investment plan. Not a knee-jerk reaction.

Before panic sets in, having a North Star can bring you back down to Earth.

If you’re an investor prone to acting emotionally based on the market’s behavior, such as exiting the market when it’s down and jumping back in when it’s rising upward, we wouldn’t be surprised if your returns were sorely lacking. During volatile events such as the “dot com” burst or the housing crisis, we’ll often see many people investing with a lot of emotion rather than possessing the discipline required to be successful for the long-term.

We get it. It’s tough to sit there and feel like you should be doing something in response to these crazy twists and turns. But it’s the reactionary, impulse investing here and there that could do more harm than good. Remember, we’re talking about accumulating wealth for long-term financial goals that include retirement. That’s not happening tomorrow.

Having an investment plan and staying the course vs. beating the market on your own

You’ve seen countless commercials from companies that tell you how easy it is to make your own trades. And that’s true – it is easy. But the allure of “easy” products like these are flooding the market with amateur investors who tend to do things like buy too high and sell too low. Especially during challenging times.

Now there’s real proof from a recent study that those who go it alone as investors don’t often fare better than the market. In fact, their portfolios perform considerably worse.

In 2016, Dalbar, Inc. released the findings of a study that compared actual investor performance to stocks and bonds market performance.

Let’s just say that the results of the study weren’t flattering to the average investor.

Looking at returns over the course of 20 years, the Dalbar study found that the average equity investor had returns of 4.67%. Yet the S&P 500 nearly doubled that at 8.19%.1

Here you are having been sold on the idea by a company that you can make your own stock picks armed with deep knowledge. It seems so easy to pick correctly with all that freedom you’ve got. Well, if that were remotely true, we wouldn’t be seeing such a pronounced difference between investor returns and the indexes.

To put this in real dollars to project the great divide, let’s take a look at what the contribution to your 401(k) would be if these average returns were compounded over 20 years. We’ll assume a $0.00 starting balance with a maximum investment of $18,000 annually over that 20-year period.

  • By investing on your own using the average return percentage of 4.67%, the maximum return to your 401(k) 20 years later would be $601,691.

  • However, the market returns based on index performance of 8.19% would land you at $910,157 to your 401(k) 20 years later.

A difference of over $300,000 in extra funds.  

It’s a shocking and scary picture for an investor who has spent his or her entire life taking some degree of risk in the market.

Imagine what you could do with that higher amount in the latter investing scenario. There are plenty of ways you could use that in retirement, right? Think about where you’d like to retire, the kind of home you’d have, the trips you’d like to take and yes, the long-term care we all need as we age in retirement. These expenses and many others aren’t going to subside on your first day of retirement. They’ll likely grow.

It starts with having a disciplined investment plan for inevitable volatility – even if the markets were doing well today, what would be your move if those very same markets were moving in the opposite direction?

By partnering with a team of fiduciary professionals like ours at Fiduciary Financial Partners, you can utilize a very comprehensive planning process in your favor. You don’t have to figure out the complexities of portfolio management on your own nor do you have to feel like you’re “locked in” to a select set of investment plan options because your advisor has to push those vehicles under his company umbrella. We’re not only highly experienced but we’re also highly independent.

If you’re among those already investing with us, take these words about emotion-free planning to heart. You could literally absorb thousands of mixed messages about the market between what you view online and offline. It’s inevitable that you’ll have questions about what these messages truly mean, but remember – none of those individuals writing in newspapers, sitting on panels or giving you real-time market analysis are analyzing what it means in the great context for you. Are they speaking to your assets, your plan, your goals? No.

Of course it’s great to stay informed. But one of the very best ways to do that and Confidently Embrace Your Financial Future is to sit down with us at Fiduciary Financial Partners. By bringing us your financial statements, we can provide you with a no-cost review of your investment goals and strategies. And if you’re an existing client, let’s make sure we get a conversation on the calendar with you this quarter too. Because the moment you feel emotion entering the picture, that’s a great time to pick up the phone or email us to review your strategy. That’s heading into tomorrow with an investment plan that works. Instead of an emotional reaction.

Call Fiduciary Financial Partners at 630.780.1534 or email info@fiduciaryfp.com today.

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John Eberle, CFA® is a Financial Advisor & Chief Investment Officer at Fiduciary Financial Partners. For nearly 20 years in the investment management industry, John has helped high net worth individuals plan a future that they and their families can embrace with confidence.

(1Source: Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior for the period ending 12/31/15)

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