Solid wealth management philosophy will pay dividends

"If you can keep your head when all about you are losing theirs…"
                                                             —Rudyard Kipling

Many individuals and businesses face tremendous challenges building and protecting wealth. I believe the secret to successful wealth management and success in general, for that matter, is passion. If you have the passion for something, you will commit the time and your chance of success will increase greatly.

The problem with most people is that they have no passion for managing their wealth, therefore they become uninterested and are unwilling to commit the time to be successful.  This problem magnifies the fact that your standard of living could be determined by the management of your wealth.

Retirement or investment accounts are critical components of your lifestyle. However, it is just as important to manage what you owe as it is what you own. Successful wealth management encompasses building, managing, maintaining and transferring wealth.

Being debt-free is a personal goal – not a financial strategy. Managing both sides of your balance sheet will enable you to increase earnings potential and allow you to make smarter financial decisions. Proper liability management can help reduce expenses, lower taxes, maximize asset growth and cash flows, and enable you to take advantage of financial opportunities to enhance your lifestyle or grow your business more rapidly. 

When investing your assets, I feel it is critical to systematically build and maintain diversified portfolios by investing assets across various industries, securities, maturities and issuers.

Asset allocation combines different asset classes to manage investment risk without necessarily reducing your potential for reward. Asset allocation aims to control volatility, defined by many as the amount and frequency of losses. 

To effectively manage risk, I believe investors need to remove the two biggest drivers of investment decisions, fear and greed. Utilizing an asset allocation strategy enables you to remove much of the questionable decision-making and the poor market timing that may result from basing your decisions on such emotions. A proper allocation will consider all of your investment goals and how, over time, to build and maintain the wealth needed to meet all of them. This is a long-term goal-based strategy, not a singular event.  As a disciplined investor you should recognize the need to reallocate your portfolio and bring it back into line with your risk tolerance. 

There are periods of time when stocks, bonds or some other portion of a portfolio will grow faster than expected and the allocation to the asset class becomes larger than anticipated or intended. As a result, your exposure to risk will not be what was intended and warrant a reassessment. Conversely, a major life event may shift your priorities or timeframe therefore changing risk tolerance and warranting a review of your portfolio allocation.

Rebalancing investments to keep them in line with a target portfolio can reduce the portfolio’s exposure to unnecessary risk. Rebalancing also helps enforce investment discipline by selling a portion of the better performing asset class at a high price, and using the funds to buy other asset classes that are under-weighted. Additionally, reallocating your investments – changing your target asset allocation – can keep your portfolio in line with your goals.

Managing your investments beyond a generic asset allocation becomes more hands-on.  From time to time there may be periods when it’s obvious the economic cycle will favor one asset class over another.

Therefore a short-term shift, or tactical allocation, to capture opportunities may be worthy of consideration. This is not market timing in the sense you are not abandoning your asset allocation strategy nor leaving the market and attempting to time reentry. You are simply moving a small percentage of your assets based upon an economic event to a sector of the economy, thereby creating an over-weighted allocation in that sector. These allocations can add risk of loss.

Nevertheless, done properly, you may reduce the risk by limiting exposure and incorporating a sell discipline. Bottom line – tactical allocation can be profitable but can also involve more risk, therefore the investor needs to explore the ramifications, for better or worse, of such a move prior to execution.

In my experience, the 1990s were the perfect storm for tactical allocation or sector investing. A technological revolution, the refinement of the internet, and Y2K created a demand for products in the technology sector. With this in mind, many flocked to buy technology stocks, funds and indices.

I believe that most investors failed to recognize that Y2K provided a timeline that required the purchase of new technology before the turn of the century which created an unsustainable product demand. Add corporate malfeasance as well as stock promotion,  and the resulting investment pool many jumped into may have looked infinitely deep when, in reality, there was a bottom. Fortunately, for most, the pool was not empty, but how hard you hit the bottom was based upon how well you protected yourself by diversifying your assets and utilizing sell disciplines. 

When you invest, you will incur losses from time to time, both paper and real.  Establishing limits on a loss may make it more tolerable.

We meet many investors and retirees alike who have everything they own in one or two securities. A buy-and-hold strategy has proven successful for many investors, but when everything you own is in one security and you have no sell discipline in place or strategy to exit, what do you do if the value decreases and you need money? It is my belief that it does not matter what you buy, provided you have a sell discipline in place to limit losses and to capitalize on gains.

We are in an increasingly complex world of finance, investment and taxes. With the vast array of investment options offered in the market place today, it is difficult for even the most sophisticated investor to sort through the plethora of available information and make the right choices within the time frame necessary to achieve the maximum benefit.  Successfully managing wealth requires discipline and passion and, as a reward, will further enable you to fulfill your future goals, hopes and dreams.

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