By Jeff Headrick, Financial Planner
What did the investment performance look like in your portfolio last year? Most people don’t know the answer to this question. And since that takes a little time and energy to figure out, why should anyone care?
When it comes to investment performance, I believe that we should care for the following reasons:
- It lies within our grasp to know
- Because goals that get measured get done
- It’s the responsible and stewardly thing to do
- It should help us build greater wealth more quickly
#1. Do Your Homework
It may sound intuitive, but not everybody does the proper amount of homework when it comes to constructing their investment portfolio. It’s not something that should be pulled up on YouTube for five or ten minutes before you place your trades, hoping that the video you watched had a strategy that will suit you best.
Investing your hard-earned money deserves as much or more time as say—purchasing a house. In the end, most of us will have far more money in our investment portfolios than we do in our primary residence when we retire. But if I were to take a poll and asked the average person if they spent more time managing their portfolio versus maintaining their home this year, I think we all know what that answer would be.
Doing your homework means reading several books on the subject of investing. It means subscribing to a magazine or two or possibly hiring a professional financial advisor that will perform this sort of necessary diligence for you.
#2. Determine Your Goals
Investment performance is relative. If you have money that you would like to invest for five years and then utilize for a specific purpose, you should have lower expectations with your investment performance than if you had a thirty year time horizon. The reason for this is that the market can be volatile over short-time periods of less than five years. Therefore, one should probably consider investing conservatively with short-term investments.
In the graph below, imagine if one had invested in late 2007 for a home down payment targeted for 2009 or 2010. The consequences would have been unpleasant.
Investing conservatively (more bonds/less stock) will do two things.
1) It will allow you to earn a respectable amount of earnings on your money
2) It should increase the probability that both your principal and gain will be there when you need it
My main point here is that we need to be crystal clear as investors and determine our goals first. Afterward, we can develop a strategy to reach that goal.
#3: Set Your Course. Diversification versus Total Return
In theory a properly diversified portfolio should reduce risk and increase return. We’ve been reading that since Harry Markowitz developed his prestigious modern portfolio theory at the University of Chicago in the 1950s. It is not a new concept.
However, my personal experience with diversification is that it does not increase return over time. It simply makes the ride less bumpy. If you are over the age of sixty, this smooth ride is probably what you need. But you should understand you may be giving up some higher return (more money) in the process.
If you are a younger investor, or an inspired investor that truly seeks out maximum investment performance despite volatility, I’m not sure diversification is so critical.
Maximizing Total Return
For example, recently I have been researching tech funds that have averaged +20% per year for the last decade*. This is by no means a short-term time horizon.
The numbers below are indeed provocative for an investor who seeks out maximum investment performance over diversification. This list represents the top ten holdings in Vanguard Information Technology Fund.
And while the holdings below are not technically diversified (this is a tech fund), one may appreciate annual returns in some of these stocks north of +100%.
Summary: Investment Performance Matters
While diversification and asset allocation are important topics in investment management, investment performance matters as well. If you found this post intriguing, or if you would like to learn more about how to invest with Inspire Financial Planning. Please call us at (910) 448-1450. We are currently accepting new clients. You can also email email@example.com, or schedule an introductory call by reserving a time on your calendar to speak with a professional.
About the Author
Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This left his family at a difficult financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since. Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.
Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.
You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.