Episode 28: What Are Your Investment Objectives?
Jun 3, 2022
So far it has been anything but smooth sailing with our economic landscape. From inflation to global conflicts, sometimes the most difficult thing is to understand how to stay centered with your investment objectives. On this episode, Isaac Wright, CFP®, ChFC® and Ricky Lafon, MBA, CFP®, RICP®, talk about the basics and when to stay the course or consider adjusting those financial sails.
Here are just a handful of the things that we'll discuss:
- The importance of identifying what you’re trying to accomplish before investing.
- Whether you will need most if not all the money within a certain window of time.
- Determining how liquid your other assets may be.
- Do you need to review your risk tolerance?
Isaac Wright: Hey! Glad to have you back here on Wright Money Tips. You know, last month, we talked about the importance of what kind of tax or legal documents you wanted to keep on file as we were wrapping up tax season. But listen, the big picture this year so far has been just the volatility we’ve seen in the economy, everything from inflation to Ukraine. The news and the media obviously exacerbate a lot of this and some rightfully so to be frank with you. But what I want to step back on today and have a really simple conversation. If you remember last month, we kept it simple. We’re going to do that again this month, when it comes to your investments.
And I think Ricky first of all, let me just say, investments are things obviously within our firm that we talk about each and every day. For those of you here who do not know Ricky, Ricky is our senior advisor here at Financial Dynamics. And many of us, I think, relative to the fact that when we see the economy do what it’s doing, I think everybody’s about to understand what I’m about to say. Sometimes the most difficult thing you can do is to stay focused on the objectives that you’ve put in place when it comes to your investments. It’s easy to get thrown off track. And let me just tell everybody this before we kind of delve into it. It’s easy to have that happen.
I think a lot of us today, no matter whether you invested money for one year, five years, 10 years, retirement plans, 529s, or all the above, no matter what the goals are. Sometimes that’s the easiest thing to have happened. A lot of us are sometimes shaken because of what we see in the news today. So really the episode for all of us today, we’re going to discuss three key things when it comes to understanding your investment objectives and to be able to stay steadfast with each one of these.
So, Ricky, let’s go ahead and open this conversation up here. I think by far the number one thing people need to remember when they get shook, when they see the news or when they see the economy or a setback in the stock market, number one is your time horizon. Let’s open the conversation up with that because quite honestly, should people even invest money if they don’t have an understanding of what the time horizon is of what they’re trying to invest for?
Ricky Lafon: Yeah, you’re exactly right. And if you know your time horizon, that’s going to help you invest your money and us invest your money much more appropriately. If a person is saving for a car, or maybe they just want to set aside money for a car, or helping a family member, that’s going to be different than saving for retirement.
If we invest money in the market, there’s always going to be times of upsides of the market. There’s always going to be times of dips in the market. Time in the market is going to mean more than trying to play the market and what I would consider, gamble in the market. If we have money set aside for retirement, you’re going to want to have that longer time horizon and not try to time the market and sell out and get back in. People try to do that all the time. That’s how they ended up losing money. If you have that right expectation, that right time horizon for each individual goal you have for retirement, you can find success.
Isaac Wright: Well, you can build a portfolio that should allow you to build with, to sleep well at night, no matter what’s going on in the economy. Let’s face it. I think all of you understand this, the economy, the way it’s been since COVID for the last two plus years, but I would even argue for 10 years, the stock market’s done, basically nothing but go up. So, you have to recalibrate what’s real in terms of what to expect from your investments.
And you’re going to have periods where the market’s going to be in a correction, or maybe even a bear market. If you’ve got money in the market that you need in six months or 12 months, and it’s going to be a majority of that money, you have no business probably being in the market. I’m going to say that. But for most people today, sometimes they just get nervous about losing money and that’s part of the process. At least on paper that you’re going to have to deal with when you get your statements. Maybe another quick question around this time horizon thought. How much money do you have liquid? Like how much money do you have at the bank? Are you concerned if you have enough to last you a certain number of months or years? I’d like to get your opinion on that.
Ricky Lafon: Yeah, no, that’s a great point. And do you have what we would consider that emergency fund? Something where you can get your hands on cash in case life happens for short-term expense and I always think about a health event that could happen. Do you have money at the bank that you could go across the street and handle that copay, that deductible, whatever comes up? And I think that’s central to a good investment plan or even a retirement plan.
Isaac Wright: Listen, again, I want to keep things simple today and I think for all of you, we’re sitting here having this conversation, really understand your time horizon. If you’re putting money in your retirement accounts and you’re 45, 50 years old, even maybe 55, and you’ve got 10 plus years before retirement or needing that money, don’t let any of this stuff bother you.
And also, don’t take it so high on the hog when you’ve had a really good year in the market. You’re going to have to average all that out over time. So, you know, that’s to me, number one: understanding your time horizon. And also, sometimes to understand your time horizon, think about how much liquidity that you have before you go out and invest in something. Especially with people going on and finding financial advice on Instagram and social media and telling them to buy NFTs and cryptocurrency. Is that really something that you can invest a large majority of your money in and feel comfortable with?
So, I think we’ve covered that topic well enough, but we can help you with any of this information. If you have any questions related to your investment time horizon, your portfolio. Again, if you have any of those questions, feel free to reach out to us. We’re here to help you with that day in and day out here at Financial Dynamics.
Let me just talk about our second objective here. And the second objective we wrote down is understanding or reviewing your risk tolerance. A lot of people that have listened to this show have probably heard this catchphrase risk tolerance. We’re going to break that down just a little bit and again, in a very straightforward way. Why don’t you go and take it and kind of talk a little bit about what risk tolerance means and some steps we think about when it comes to that?
Ricky Lafon: Yeah. I think this is a multifaceted topic that we need to dive deep into. So first of all, do you have other resources, liquid resources to get through market volatility, or we just call that the storms of life? You know, and that gets back to that emergency fund that we were just talking about.
Also, we have to take into account what time horizon that you have, but also what life stage you’re in. If you’re a younger person and you’re saving for retirement, you probably want a little bit more risk built into your plan because you want that upside potential. But if you’re fixing to step into retirement within a year or six months, you probably want to remove some of that risk as well. Those are things that we have to talk about and consider in a plan. Another thing that is different than risk tolerance, what people think about is risk tolerance, is what kind of guaranteed income will you have in or throughout retirement? Are you blessed with a pension? Will, you have a strong social security statement?
Will you have an annuity that has an income rider attached to it that we can turn on and you can have guaranteed income from an annuity? Do you have rental income? If you’ve got two or more of those things, your risk tolerance may be greatly different than someone who doesn’t have those items and all of those things factor into a client’s risk tolerance.
Isaac Wright: Yes. Well, the last thing that you said here, to me, I think is a big takeaway in terms of what people forget. So, I’m not saying social security is going to continue to be what it is today, 20 years from now, but for the most part, without again, being high drama, I think you’re going to always have some stability of income when it comes to some level of a social security check. If you are in a position that you’ve already kind of placed money into something that’s going to guarantee some income, like what you mentioned with an annuity, or maybe you have income coming in from dividends, rental income, pension-styled income, I think social security is going to always be there to some degree.
I’m not saying it’s going to be perfect, but a lot of times people forget the fact that they may already have income sources that allow them to be a little riskier when it comes to their portfolio. But again, everybody has these thoughts around trying to be more risk, less risk when it comes to certain factors in the market, it just gets so tough.
And again, getting back to not just the time horizon, but timing the market. It’s just impossible to make that happen and be right. Normally twice when you get in, when you get back out, you’ve got to figure out when to get back in. I know we’ve talked about this a couple of times over our podcasts, but it just, it always seems to come back up.
You know, we’re very fortunate for the families we serve here. I think they’re pretty stable in the fact that when we have moments like we’ve had, it’s not like we were taking calls that are upsetting or anything like that. We’ve done a really good job of setting the right conversation and the right expectations around the portfolio.
But, you know, just keep in mind this, before we move onto the third thing here, risk tolerance is simply what kind of measure that you would assume that you could take on as a loss on paper without hitting your uncle point. So that means basically getting to the point, where are you going to make rash decisions?
No matter what the topic of the day is on the news, you know. So, I think a lot of you just don’t mean to make this clear. A lot of you are in a place that sometimes you’re investing money without even doing the due diligence of a risk tolerance assessment, or quite honestly, maybe you didn’t understand the level of risk. And so, we can really help you detail that out. But Ricky, I think these are just very basic building blocks of having a successful portfolio and investment strategy. And again, when I say investment objectives, that’s a big one.
Last but not least, you know, especially when you’re working with somebody that’s helping you with investments, it’s just, let’s call it, setting the right expectations. Why don’t you kind of take that topic and start us off?
Ricky Lafon: Yeah. And I think that’s one of the most important aspects here of reigning in the emotions. You know, if you’re working with an advisor, we’re in this for a relationship and it’s more of a long-term relationship. We enjoy the relationship with our clients.
So, setting the right expectations at the forefront, helps us to have those long-term expectations in relationships. If we set the right expectations for investing, then I think we can accomplish retirement goals better. Here’s why. So many people want the market gains, but when the market takes a step back, they get that anxiety that you were talking about before.
So, if we have the right expectations that we’re investing for the time horizon, that we have the risk tolerance taken into effect, and we’ve got those expectations, correct that if we go through some market issues, we’re in this for the long haul, we’re not going to make those rash decisions and sell out, we’re not going to realize those gains, we can find success. Setting those expectations is at the forefront of any relationship.
Isaac Wright: Well, you know, when I hear the word expectations, I also think it’s important, and I think this would be for all of you here. When you have expectations set, I think it’s important to have somebody that helps you revisit those expectations.
And again, all too often I think in our industry, I’m not saying everything is perfect, but I think the industry is moving into a whole lot better position as far as having advisors that truly advise and build that relationship. I know here at our firm, we’ve been doing that for years. But I guess I just want you to understand, is when you’re investing money and you understand risk tolerance, your time horizon, and you’re setting that mutual expectation, you have to have a revisiting of that expectation because you’re not going to remember everything that’s said to you in six months or 12 months.
So, you know, what we’re trying to get across here today in a very straightforward way is just some building blocks of not getting, just not getting too emotional, not getting too off base when you’re seeing inflation as big as it’s been for the last, you know, or going as high as it’s been for the last 40 years plus. And then of course, you know, we’re still going to always deal with, you know, kind of conflicts.
If you guys want, let me say, as we wrap up today. We have a checklist of the things that we’ve kind of discussed. So for all of you here, we have a checklist that you can be able to go. If you want to request this from us, is a really nice checklist on things like investment objectives, goals, almost a way for you to be able to kind of check each box to say, “Hey, have I considered these things?” We found that to be somewhat helpful for people that get a little nervous when it comes to their investments or investing. And, Ricky, I think what we’ve covered today is probably a good building block towards some of these conversations.
And I just want to say good work today. If any of you have any questions related to what we’ve talked about or anything related to your finances, you know where to find us on wrightmoneytips.com.
If you have any concerns or questions, you can visit wrightmoneytips.com to request some time on our calendar. Or please subscribe when visiting wrightmoneytips.com to receive notifications on new episodes, our newsletter and even upcoming events.