Is Your Portfolio Personalized or One Size Fits All?

Paul Brown |

“Are you a conservative, moderate, or aggressive investor?”   In the investing world, this question can feel unavoidable. In your 401(k), it is highly likely that some of the investment options available to you make use of these three labels in their names. Many investment newsletters myopically approach investing in the same fashion.

The question is often asked without needing to know anything about you as a person other than you want to invest money – hence why so many advisors and electronic tools like to ask it. Some investment firms avoid talking about clients’ life goals and personal investment preferences by using the question as a catch all substitute, saving them time and money potentially at the client’s expense.

Is your investment portfolio 1-Dimensional or 4-Dimensional?

Because firms, advisors and internet based investment platforms cut straight to the question about investor type, they leave out three other critical dimensions. At Wings Wealth Management, we prefer an alternative approach – one that focuses equally on all four dimensions. Here they are:

Dimension 1: Your goals in life

The first dimension you want to consider is what is the goal for each investment account? What rate of return do you need to achieve the goal? Is it likely that rate of return is attainable?

Perhaps you want to ensure you can pay for your children’s or grandchildren’s college tuition, or you want to retire with the same lifestyle you have today. Perhaps you are investing to pay for a home renovation or fund charitable giving goals. Maybe you hope to fund extra travel expenses early in retirement. If retired, you likely need a certain monthly withdrawal from your investments to fund living expenses.

This is a critical dimension to think about before investing because only you, the client, can address it. This is why we begin the investment conversation with planning for the goals that are important to your family.

Dimension 2: Your financial capacity to take risk

The second dimension to think through is your financial capacity to take risk. How reliable is your income? Your spouse’s income? Do you have emergency funds? If so, do you have enough to last through a crisis, a sickness, or to fund unexpected expenses? Do you have investments outside of retirement accounts? How close are you to retirement, or are you retired?

Questions like these can help you determine how much risk to take in light of your life goals. If your financial capacity is not strong, you might want to consider a less aggressive investment strategy for some of your accounts. Without taking financial capacity for risk into consideration, investment outcomes may turn out to be different than what you expected or hoped for.

Dimension 3: Your temperament for risk

The third dimension is about your temperament for and willingness to take risk. It is signified by that question: Are you a conservative, moderate, or aggressive investor? It is easy to think you are an aggressive investor when markets are going up. But all too often when markets drop, we encounter clients who all of a sudden don’t feel as aggressive as they did when things were going well.

Often an investor’s true temperament for risk isn’t discovered until we have worked together during different market conditions. So, to help us quickly understand a client’s temperament for risk, we use mathematically based tools and scientific theory to objectively pinpoint your Risk Number. You see, the question of your investor type isn’t treated as a shortcut, but is instead a key dimension that helps formulate your personalized investment strategy.

Dimension 4: The current market environment

The fourth and final dimension to consider when building your investment portfolio is the current market environment. This involves considering interest rates, stock valuations, currency values, inflation, tax laws, central bank policies, and geopolitical events to name a few. All of these are in a constant state of flux.

Because there are literally thousands of combinations of characteristics that move values in the stock, bond and cash markets, you will want to have a process that incorporates changes in the characteristics that could have the most impact on your investments. Knowing what to focus on and when and what to ignore is key.

The advantages of a personalized investment strategy

If you are only considering 1 Dimension, you probably don’t have a personalized investment strategy. In fact, you may be utilizing a one size fits all solution that doesn’t reflect you or your family’s values.

At Wings Wealth Management, we believe that a personalized investment strategy should include all 4 dimensions, reflecting your family’s most important goals, your family’s financial strengths and weaknesses, your family’s temperament for risk, and current market conditions.  The advantage? A process that structures your investment strategies to help you make progress toward your goals.* If you want to learn more about how to apply the 4 dimensions to your investments, please give us a call.

* No strategy assures success or protects against loss. Investing involves risk including the loss of capital.