Portfolio Management: Like an Actual Pro

By Gary Silverman, CFP®

As we cruise to the last couple of columns looking at some of my hard-learned lessons on managing investment portfolios, I want you to consider the next decade, not the next year. After all, with some exceptions, investment portfolios are for longer-term needs. Even if you are drawing an income from it now, you expect that income to last until you’re no longer around.

Could the Dow go up 30% next year? Sure it could. Could it drop 30% next year? Sure it could. Both are improbable, but both are possible. So how do we, as a firm, handle this? We don’t. It’s not easy; we have opinions like everyone else, but acting on those opinions would not fit our overall investment philosophy.

Imagine an investment in which you have a 30% chance of losing money this year. Would you want a part of it? Probably not. Yet if I told you that it would average 10% a year for the next 20 years it sounds quite a bit better. Both describe stocks.

If you are concerned with what your money will be worth in the next year or two, then you shouldn’t be in the stock market to begin with. You should keep that money in the bank. If, on the other hand, you want to ensure enough money is there 10 years from now—when your child enters college, or when you finally retire, or when you reach your 90s—in that case stocks can help.

All of this comes from our fixation on goals—what you are planning to do with your money. Financial success begins with understanding the core values and goals of our clients. I often get questions that concentrate on investment returns:

Why didn't my portfolio beat the S&P 500 last month?

My neighbor said the return on his investments with the broker across the street from you was three percent higher than yours last quarter. What about that?!

A friend of mine doubled her money in the futures market in one month. Why can’t we do that?

These types of questions show that the client is looking at a short-term fix to their problems. Many people get caught up in trying to time the market; to find the next Apple Computer or some fool-proof way to double their money in a year. Instead, we try to steer them to a long-term solution to their goals.

Getting irrationally exuberant because of market gains or panicking after a holding gets hammered is not a healthy way to react to the market.

We use asset allocation to reduce risk and maximize return in a way that matches a client’s specific situation. In this we use both equities and other types of securities…no one type of investment is the answer to every problem. Using this investment process, we build wealth, so that our clients can realize their dreams.

So begin with those dreams. Hone them into goals. Match your portfolio to those goals. Then ignore all the noise around you.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing