Your financial investment strategy should not exist in a vacuum—it needs to be part of an overall financial plan designed to meet your needs and achieve your goals.
In the old model, where people gave brokers a chunk of money and they invested it in whatever stocks the wire house was pushing that day. Though they may have called themselves “financial advisors,” their advice felt more like throwing a dart at a list of companies. A financial investment strategy should have a strong foundation and be in line with your long-term objectives and holistic financial picture.
How much should you know about your advisor’s investment approach? You don’t need to dig into every nuance of your advisor’s financial investment strategy or portfolio management. But you should have broad understanding of the general principles underlying the strategy to make sure it aligns with what you are looking for, so you can assess how they are doing for you. If not, you might consider changing financial advisors to find someone whose approach better matches your goals.
Principles of Choosing an Investment Strategy
What do quality financial advisors look for in an investment strategy? What should you know about as you evaluate your options?
- An investment strategy should be time-tested and based on academic research. It should not be about what’s done well over the recent past, but rather what can serve you best in the long-term. A solid investment strategy does not rely on short-term predictions or market movements, but rather on research into the long-term behavior of capital markets.
- Portfolios should be diversified across asset classes, geographies, and industries and contain a large number of holdings. Portfolios comprised of mutual funds or ETFs will have much greater diversification than those with a few stocks. Diversification reduces risk and makes sure you have exposure to a wide opportunity set. It is a key principle of Modern Portfolio Theory.
- Investment strategies should take fees and expenses into account. Paying for investments can add up and affect your overall portfolio performance. For example, active managers generally charge higher fees, which can eat away at returns. Some may also neglect to take taxes into account, relying on high-turnover strategies that produce lots of short-term gains and are more geared to high absolute returns than your after-tax bottom line.
Understanding Asset Allocation
An important goal of a financial advisor is to make sure your asset allocation is tied to your personal financial plan. There are two ways to think about risk—risk capacity and risk tolerance.
Risk capacity is about how much risk you can afford to take in order to reach the financial goals you envision for your future. A lot of factors go into calculating this capacity, including:
- Income
- Current assets
- How much you save
- How much you spend
- Age
A financial advisor will use these factors and others to determine what kind of returns you’ll need to help achieve your goals and objectives, which, in turn, informs how much portfolio risk you should take. The higher the equity percentage in your portfolio the riskier it will be, with the potential for greater declines (and advances).
Risk tolerance, on the other hand, is the gut feeling you get about how much risk you’ll be able to tolerate emotionally.
- How did you feel when you saw the market dive in 2022 and in early 2020?
- Do you easily become worried and insecure about your future?
- Or are you able to look beyond short-term declines with equanimity in the knowledge that markets will rise and fall over time?
This has more to do with your personal ability to withstand variability in investment values than an analysis of the numbers. If seeing the market and your portfolio go down makes you panic and want to go to cash, you may need to dial back your portfolio risk. Can you cut your spending or adjust your goals to make up for it? These are all crucial discussions to have as you work with a financial advisor.
Investment Analysis & Portfolio Building
Once an appropriate asset allocation is determined, an advisor should select investments (mutual funds, ETFs, or separate account managers) within each asset class, undertaking the appropriate due diligence into the wide universe of investments available to build a portfolio. For instance, we look at the 4 P’s—People, Philosophy, Process and Performance—when we assess investment opportunities.
LEARN MORE: Our Investment Approach
It is important for an advisory firm to have a centralized team of specialists with investment expertise that sets investment strategy and makes investment decisions to the benefit of all clients. Our dedicated investment committee, comprised of seasoned professionals, oversees all portfolio design and investment selection. At firms with a more decentralized approach, people with various levels of knowledge may choose and trade investments for clients, creating inconsistency firm-wide.
In addition to the right decision makers, an investment strategy needs to be supported by the right resources. There are a number of technologies and tools that can help with the implementation of investment strategy and management of client portfolios:
- Investment databases, covering most available investment products, are used for manager research and analysis of portfolios and investments.
- Asset allocation software is used to model expected returns and risk of various asset allocations. This helps assure that client portfolios are on the “efficient frontier,” producing the highest expected return for a given level of risk.
- Rebalancing and trading software helps to efficiently trade, rebalance to target allocations, and perform tax-loss harvesting.
- Portfolio accounting and reporting software downloads data from your custodian, tracks transactions, cost basis, performance and produces reports on your portfolio and investments.
Ready to take control of your financial future? Meet our team of experienced professionals, and learn more about our financial investment strategies. Our long-term investment strategy is designed to go the distance — to build long-term value and avoid short-term reactive thinking. Schedule a call today to start your journey towards financial wellbeing.
Team Hewins, LLC(“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. The material provided by Team Hewins is for informational purposes only and is presented soley as an illustration of the typical Team Hewins client experience. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Certain information contained herein constitutes forward-looking statements. Team Hewins does not guarantee the achievement of long-term goals in the portfolio review process. Past performance is no guarantee of future results, and a diversified portfolio does not guarantee a positive outcome. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future.