WEALTH INSIGHTS

Are you investing towards your goals?

Investors aren’t rational beings.

Investors tend to buy high and sell low. They tend to become greedy when markets are approaching a high, and they become fearful when markets are at, or near, low points.

Studies show that the more frequently investors check their portfolio performance, the more they trade, and the worse their performance becomes. In fact, investors in liquid investments (such as stocks) tend to sell quicker than investors in illiquid investments (such as real estate) because the pricing is readily available.

How can you avoid falling into this trap? Should you just buy and hold? Set it and forget it?

Our advice is to focus on defining and prioritizing your goals and designing an investment plan to achieve your myriad goals. Then, track your progress based on your goals rather than worry about every uptick and downtick of the S&P 500 Index.

Defining your goals

Ask yourself these questions: What do you need to have? What would be nice to have?

When it comes to retirement, you’ll need to have enough money to cover your basic financial expenses – food, housing, clothing, health care, etc. It would be nice to have additional money for enjoying your retirement – travel, entertainment, vacation home, sail boat etc.

For many investors, their biggest concern is maintaining their lifestyle through retirement. After your lifestyle needs are met, define your other high-priority goals and map out a plan to align the remaining assets to meet them. What is the purpose of your wealth? What causes do you want to support? What legacy do you want to leave for your family?

Defining your goals based on their priority and time horizon can help you assess your current financial situation and create a roadmap to achieving your goals.

Safety, Market, Aspirational

Once you’ve defined your goals, you can implement an investment plan that seeks the most efficient risk-return tradeoff for each stated objective. We recommend earmarking your funds into safety, market and aspirational segments.

Safety. The ‘safety bucket’ should be where you keep your low risk, stable funds for daily living expenses, emergency expenses, and near-term spending.

Market. The ‘market bucket’ should be earmarked for your long-term needs. This would be the account for funding your retirement. You want this account to grow over time, and hopefully avoid the full brunt of a market downturn. As you come closer to retirement, you’ll want to dial down the risk in your portfolio.

Aspirational. The ‘aspirational bucket’ is where you would take on more risk to achieve your future goals. Significant wealth accumulation often requires investments in assets that require leverage and concentration such as real estate, hedge funds, private equity, or ownership of a business. With that potential pay-off, though, comes greater risk. Therefore, you want to earmark the funds in this bucket for your long-term legacy, not your essentials.

Structuring your investment portfolio in terms of achieving your financial goals will help you to tune out the noise of market fluctuations. View risk as the probability of permanent loss between now and the date of the goal that your money is working towards. There will be volatility in your investments, but understanding that those fluctuations are not going to derail your future provides a less stressful investing experience.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of SVB Private or other members of Silicon Valley Bank Financial Group. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein