In an ideal investing world, investors would receive positive returns without ever having to consider the possibility of risk. But investing is not and has never been like this. Risk and return go hand in hand, and in order to get the latter, you must bear the former. Investing always involves some level of trade-off. The truth is that risk is an inherent part of even the most robust investing strategy, and the way you and your financial adviser craft your personal investment strategy largely depends on your long-term financial goals.
While there is no guaranteed formula for how to invest, there are some very important considerations that will impact your ultimate success. Among them is determining your asset allocation—your portfolio’s mix of stocks bonds and other securities. This decision will help you determine the amount of risk and return you might need in order to optimize your chances of achieving your long-term investment goals. In this article, we will outline four important topics to consider when creating your personal investment strategy.
Before you choose and develop your asset allocation, you should first identify your goals and consider your likely investment time horizon—at Fisher Investments Canada we define this as how long you will need your investment portfolio to last. It is only once you have carried this out that you can begin to address the question of how to invest and achieve the returns needed to achieve those goals.
We believe you should always consider the following topics when deciding your long-term investment strategy.
Before determining how to invest, you should understand why you are investing. Some think their only goal is to protect their existing wealth, but this goal is often misguided. Investors with this goal sometimes fail to account for inflation, unexpected cash flow demands or a potentially longer time horizon than planned. Depending on your individual situation, it can be unwise to place all of your savings into low-returning bank savings accounts because their returns may not be enough to counter inflation or some unexpected future costs.
Others’ primary investment goal might be to grow their wealth as much as possible and expand their opportunities. These investors may also set goals that extend beyond their own monetary needs—for example, to provide for a younger spouse, build a legacy for family, to establish a trust or to give to charity.
Finally, a select few might gear their investment planning towards spending everything throughout their lives. However, this goal can be dangerous if not done properly. Investors with this goal need to be sure to plan for possibly covering unexpected costs and a long enough time horizon. Otherwise, they risk drawing down their investment account sooner than planned.
In order to successfully create a strategy for how to invest, you must first determine your long-term investment goals. However, it is important to keep in mind that your goals may not always be static. You may need to adjust your goals or lifestyle given certain financial constraints or developments in your life. For example, if you experience any health issues, your ongoing costs could rise and you may have to withdraw more in the future. To prepare for these potentially unexpected costs, it can prudent to plan for more growth. However, if your goals change due to unforeseen circumstances, your investment strategy may need to change as well depending on your situation.
Put simply, at Fisher Investments Canada, we define your investment time horizon as how long you will need your investment portfolio to last. For couples, this time period often relates to both spouses’ potential lifespans or those of other beneficiaries such as children or grandchildren. If you have a rough estimate for how long your portfolio may need to provide income and how much, this will help you understand how to invest based on how much you may need your portfolio to grow in order to meet your goals.
However, if your investment time horizon involves your potential lifespan, you should remember that you may live far longer than you’d expected. Everyone alive today belongs to a generation that can reasonably expect to live longer than their parents or grandparents ever did. One potential upside of this is that you may have longer to achieve your goals. On the flip side, however, you may also need your assets to last longer.
Never underestimate your investment time horizon. One of the biggest risks an investor faces is running out of money or coming up short of their goals. We recommend that you ask the following questions in order to help guard against this possibility:
The answers to these questions are important and will help you determine your priorities when planning your optimal long-term investment strategy.
Risk is an inherent part of investing across all asset classes, from the stock market to basic savings accounts. When some people refer to risk in investing, they’re talking about short-term negative volatility. However, this volatility is far from the only type of investment risk. One of the most important risks to consider is the possibility that you don’t reach your long-term goals.
Temporary drops in your account value can be difficult to weather, but that short-term volatility might be necessary in order to achieve the growth needed to achieve your long-term investment goals. Deviating from your investment strategy in times of heightened volatility could hurt your chances of achieving your goals.
It is often best to remain disciplined and stick to your long-term investment strategy and asset allocation than to make emotional or fear-based decisions and invest in assets that don’t match your goals.
The three investing considerations we’ve just discussed—goals, time horizon and risk—are all important drivers of a crucial investment strategy decision: your portfolio’s asset allocation.
If you need high levels of growth for your goals, you may have to accept a higher level of shorter-term volatility by owning stocks in order to capture their longer term returns. If you don’t need as much growth, you may consider securities with lower short-term volatility and lower long-term growth prospects like bonds. However, bonds may not be as low-risk as you might imagine.
The optimal asset allocation should be the one that gives you the best chance to achieve your long-term investing goals. Ultimately, what you decide to be a safe asset allocation may well depend on the amount growth you require to reach those long-term goals and your understanding of risk. If you have any questions on where to start, Fisher Investments Canada may be able to help.
There are many factors to consider when planning how to invest and many of investment strategies to choose from. Fisher Investments Canada can help you understand your long-term investing goals and begin the investment planning process. For more information, download one of our educational guides or contact us to arrange an appointment.
Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada.