Article
There are around 4,300 publicly traded US companies. If you expand your universe to include international stocks, you have even more options. Investment fund providers have taken all these companies and sorted, ranked, and screened them in almost every way imaginable. With thousands of options to choose from, how can you decide which investment best suits the goals of your plan and portfolio? It’s easy to feel like a small boat searching for good fishing grounds in a vast ocean. To position yourself for the greatest odds of success, you need to go beyond just investment options and instead create a holistic portfolio management strategy.
What is a holistic portfolio strategy? A portfolio strategy is a series of activities that begins with identifying your financial goals and the environmental factors, develops guiding plans, and finally coordinates procedures and resources to accomplish the goals.
There are five key features of a portfolio management plan:
1. Have a financial plan that is being implemented: Without a financial plan, all you have is a bunch of ingredients without a recipe.
2. Have an investment philosophy: A solid investment philosophy provides a multitude of benefits. Without a clear understanding of how you can generate returns, you may fall prey to every fad and end up incorporating so many different approaches that you create a portfolio that is not tax-efficient, cost-efficient, or aligned with your plan.
For long-term investors, small-company and value stocks offer the potential for attractive risk-adjusted returns. It’s not just the logic that is appealing: for small-company stocks, it is investing in a great company as early as possible; for value stocks, paying less for a good business is better than paying more. Data on small and value stocks tells an interesting story for investors with the patience to invest in these areas. (Note that past results are for illustrative purposes only and do not imply anything about the future.)
3. Maximize the attributes associated with your account types: Different account types have different tax and withdrawal structures. By using sound investment location strategies, you can maximize your after-tax returns. Taxes are one item that you have complete control over in a portfolio. By not paying attention to sound portfolio tax strategies, you are ignoring a tool that can add meaningful value that you have total control over.
4. Have a system to ensure your portfolio is managed according to your plan: If you cannot execute, you cannot be successful. A good system gives you the ability to view and make changes to your portfolio at both the macro and micro levels.
5. Have a plan for market downturns: Long-term investors know that while market downturns are painful, they can also provide opportunities—from tax-loss harvesting to investment purchases. If you don’t have a drawdown plan, you may get caught up in the emotional stress of the situation instead of taking advantage of opportunities.
Creating a holistic portfolio involves formulating both a strategy and an execution framework. When done well, the holistic plan is a powerful force for building long-term wealth. Check with your financial advisor to make sure your portfolio and your financial plan are working together for you.
