When it comes to investment planning, you're encouraged to think big, to aim for the top. It's just like running a race, playing a game, or entering into a competition: Your goal should be to win... right?
It may be human nature to seek to obtain that number one position, but for investors, the concept of winning should take on a new meaning. Instead of focusing on sprinting to the finish line, a slow and steady approach may be the more rational choice.
Your Comprehensive Financial Plan: The Tortoise or the Hare?
We all know the story of the tortoise and the hare; that boastful rabbit who mocked his slow, steady opponent — only to lose in the end, despite all of his speed. In this case, the hare is a stock picker, an investor who attempts to beat the market by picking the "winning" stocks, jumping in and out of the market when those stocks don't perform as he expected... and racking up fees and costs as he goes.
In contrast, the tortoise is the investor who follows a passive approach. This rational investor crafts a truly diversified portfolio that includes investments across asset classes and that offers protection against market volatility. The tortoise investor remains focused on her long-term goals, and doesn't get easily distracted by that hot stock tip or advice from the latest market "guru" in the financial media.
While taking the tortoise's route may not seem as glamorous or exciting as the hare's, qualitative studies like that from market research firm Dalbar indicates that the passive approach beats the active approach over time. Many investors tend to let their emotions run the show, reacting to market ups and downs by buying high and selling low—and underperforming indexes like the S&P 500 by significant amounts.
Financial Strategies: The Importance of Diversification
Further, many investors aren't properly diversified. While conventional wisdom may feel that holding a couple of different stocks counts as diversification, the truly diversified portfolio holds assets from across a range of classes, from large-cap to small-cap, domestic to foreign, stocks to bonds and alternatives, too.
Achieving this careful mix takes planning and thought. It's a financial strategy that is constructed to lower your exposure to unnecessary risk and offer protection from market volatility. In other words, it keeps you from putting all your eggs in one basket. Further, asset allocation is designed to help you meet your personal financial goals.
But the key point is this: The passive investor isn't reacting to market ups and downs, selling and buying based on emotions, personal tips, or advice handed out through the financial media. The passive investor understands the importance of the long-term view. Consider that those who sold their stocks in response to the financial media's sensationalistic reaction to the so-called fiscal cliff showdown of 2012; the media described it, among other things, as a "ticking time bomb for stocks."
Understandably, many investors panicked and jumped out the market. In the end, however, Congress made a deal, averted the fiscal cliff, and those who weren't still in the market missed out on the S&P 500's total return of 32.39 percent.
Is Your Comprehensive Financial Plan a Hare or a Tortoise?
Despite the financial media's insistent focus on beating the S&P 500, the rational investor understands that the key to success lies in:
- creating a properly diversified and allocated portfolio;
- rebalancing asset allocation regularly;
- not reacting emotionally to market volatility; and
- sticking to a long-term plan
When you follow this approach, coming out in the middle is a worthy goal. Meet with your trusted wealth advisor to ensure that your portfolio is diversified through proper asset allocation... and avoid being the hare.