When financial markets experience a significant decline, a major surge, or a period of unsettling ups and downs, for most investors, it’s difficult to ignore the emotions we feel during those events. Having a financial plan paired with a disciplined approach to investing can help you accept more of the short-term market swings by maintaining a focus on long-term results. You may be asking yourself, “what is a disciplined approach to investing?”
A disciplined approach to investing is setting a long-term investment strategy that considers our personal aptitude for market risk, is broadly diversified, and in which we adhere to an appropriate asset allocation for the long-term. Historically, this method has been proven to deliver long-term success. Research also tells us that predicting and timing market movements is a lot like gambling where a few lucky calls may result in short-term success, but it’s unlikely to translate into consistent long-term success.
Risk and return are closely related in the world of investing; without some level of risk, no return should be expected. Market risk makes itself apparent with the fluctuations in the price of securities. We have seen economic, political, and environmental crisis after crisis roil financial markets and lead to widespread panic among investors. Market risk is always present and can appear muted or noisy at times but we are rewarded when we remain invested in financial markets regardless of the news of the day. Understanding the relationship between risk and return helps us to find the appropriate mix of investments (asset allocation) for our portfolio based on our stomach for risk.
Diversification helps to manage risk by owning a basket of investments which are anticipated to react differently to the same market event. Maintaining an appropriately diversified portfolio helps to increase our long-term investment success while also helps to mitigate the amount of total portfolio volatility from a given market event. An investor seeking protection through diversification aims to own many companies from all over the world to help reduce risk.
Although a “set it and forget it” investment approach may work for some investors, periodically re-evaluating your personal risk profile and rebalancing your investment strategy to maintain its alignment with both your risk tolerance and your goals is optimal. Life circumstances change often and so do our personal goals and capacity for risk. Revisiting our investment strategy regularly helps to ensure we are not taking on more risk than we anticipated.
Having a financial planner that can help us understand the many risks we face as an investor, is skillful at evaluating our personal risk profile, and helps us develop a custom investment strategy which is aligned with our financial goals is important to maintaining a disciplined approach to investing.