When my wife and I were expecting our sixth child, we realized that our minivan was no longer going to fit the needs of our family. While I would have loved to purchase a sports car, we agreed that that would not fit our needs either. So, we began the process of looking for a larger vehicle. SUVs were very much in vogue at the time and we had a number of friends who owned Chevy Suburban’s or other large SUVs. In addition, growing up my family owned a Suburban and I had many great memories of that vehicle. As a result, when I went to the dealership with my wife, I went straight to the SUV section of the lot.
My wife had different thoughts (over our 31 plus years of marriage, I have found that this overall situation is fairly common – different opinions, thoughts and experiences results in situations where we may not see things similarly). My wife went straight to the 15-passenger van section of the Chevy dealership…scary, huh?
Now, it is important to understand that I promised myself, as a teenager, that I would NEVER own a large van – they did not seem “cool” to me. After comparing the costs/benefits between purchasing a Suburban versus a 15-passenger van, my wife (and I) concluded that the van was the correct purchase for our family. (Sometime, you should ask me about the three conditions I placed upon our decision to purchase the van – you will learn a little more about me and my childish thought process.)
What does this experience have to do with the investment world and risk, you might ask? Sometimes, in our interactions with others or, based upon prior life experiences, we might feel strongly that we should follow a preset plan (i.e. investment strategy), but that plan may not actually be what is best for us to help achieve our goals. For example, we may have friends who are or appear to be successful and we ask how they invest their money. Inevitably, they share a successful strategy that has worked for them and one that similarly makes sense to us.
In situations like these, we may feel the desire/need to follow their plan, after all, their plan worked for them and will most likely work for us. However, the primary challenge with this is that an investment plan/strategy should dovetail nicely with your personal financial plan, goals and needs, just as a vehicle should reflect your needs.
At Montage Financial Advisors (MFA), we have found that there are a number of factors that should be considered when developing an investment strategy. First and foremost is recognizing that one’s personal tolerance for risk/rewards will be different than another person’s. I know many people who feel very comfortable with risk – they are comfortable with investing not only all of their investible assets in the stock market, but are also willing to borrow additional funds to invest in the stock market (after all, they reason, “the cost of borrowing money will be less than the investment returns I will receive”).
Conversely some people are uncomfortable with investing any of their assets in the stock market for fear of losing all of the money. Most of us will be somewhere in between these two extremes, but before you start an investment strategy, it would be good to understand your comfort level with risk. To this end, MFA utilizes tools to assist our clients in understanding the potential risks associated with specific investment strategies so they can choose a strategy that fits their needs (for some it may be a sports car version, a Suburban version or even a 15-passenger van version). This process will most likely require some level of compromise, if you have a spouse/partner, as both of you may not see the risk/reward tradeoffs similarly.
Second, we recommend our clients consider the cash flows they might need for the next four to five years. These funds should either be left in cash or invested in bonds that should have minimal risk. We look at these funds as your war chest – funds that can be accessed when needed without fear of what has happened recently to the stock market.
Third, we recommend that you consider what investment returns you NEED in order to achieve your goals. For some, they may need to lean towards being fully invested in the markets while others may not need substantial returns and therefore can have a large percentage of their assets in bonds and other less risky investments.
Of course, all of the above decisions will be influenced by your personal financial plan and goals. One person’s goals may be to spend every last dollar before they die while others may want to leave a substantial inheritance for heirs.
Similar to the example listed above, if I gave in to my desires/feelings for a Suburban, we would not have had the room needed when child number seven came along – the Suburban would not have been the solution to our needs/plan. In looking back over the nearly 20 years we owned a 15-passenger van, I see that my wife was right and that the van was the right decision for our family. It provided the means for us to enjoy two cross country driving trips, countless camping trips, drives to the beach and snow, etc. This vehicle worked for us, but for the majority of others, it would have resulted in an unsuccessful decision.
The key lesson learned is that no one investment strategy works for all people, just as one choice in vehicle will not work. While we may be tempted to ask our friends what kind of car they drive (investment strategy they use) and in turn implement something similar ourselves, it would be better to decide what kind of car you want/need/can afford, etc. to achieve your goals and implement your specific plan.
At Montage Financial Advisors, we strive to help people have a better investing experience. We do this by focusing on the things that you can control:
- Create an investment plan to fit your needs and risk tolerance.
- Structure a portfolio along the dimensions of expected returns. https://www.montageadvisors.com/blog/marital-bliss-and-dimensions-of-return
- Diversify Globally. https://www.montageadvisors.com/blog/road-trips-and-diversification
- Manage expenses, turnover and taxes.
- Stay disciplined through market dips and swings. https://www.montageadvisors.com/blog/speeding-tickets-and-timing-the-market