Personal Finance

Back to Basics: The Importance of Having an Investment Plan

December 5, 2023

Earlier this year, the Wall Street Journal profiled investors who used an investment thesis of “buy and hope”— a fortuitous approach during bull market times — only to experience an awakening after the markets changed their course in 2022.1 For some, the importance of an investment plan may only become apparent during more challenging market times. It’s worth a reminder: your investment plan has been put in place to help manage risks and work towards your long-term financial goals despite the inevitable market ups and downs.

What constitutes a good plan? A solid investment plan is a well-structured, personalized strategy that provides a roadmap for investors to achieve their financial goals while managing risk. We may overlook the importance of having portfolio guidelines and consistently following them, but these guide portfolio construction, management and decision-making over the longer term. Here are some perspectives:

Risk Tolerance — One of the principal objectives in constructing a portfolio is to manage risk, to achieve a sound balance of growth potential and protection of capital. In rising markets, it’s easy to forget the latter part of that statement — in other words, what happens if things go wrong? Every investor has a unique risk tolerance, which may be reflected in their comfort level with the ups and downs of the market. During strong markets, it may be easy to get caught in the prevailing momentum and forget that achieving the highest possible return often comes with excess risks. Inherently, we all want low risk — nobody likes to see investment values go down — but avoiding all risk would mean foregoing all but minimal returns, which can lead to other risks such as not meeting financial goals. We need to strike a balance.

Asset Allocation — One way to help manage risk is to determine how much of the investment portfolio should be invested in different assets; from a very high level each of equities, fixed-income securities and cash equivalents. The ultimate objective is to maximize returns consistent with your personal circumstances: goals, time horizon, comfort level with risk, etc. Typically, individuals with longer investment horizons may tolerate greater volatility, leading to higher equity exposure. In contrast, retirees reliant on securities for income may have an asset allocation with greater fixed-income exposure. Notably, the returns of certain asset classes can evolve over time — take the yields on many fixed-income products we see today. Managing asset allocation may involve shifting gears.

Diversification — No single asset class, industry or geographic region consistently performs at the top over time. A diversified portfolio can give access to the best-performing asset classes every year. Industries, sectors and even entire asset classes can fall out of favour depending on the prevailing economic or market conditions. Diversification can help to smooth performance returns within a portfolio from the natural downturns that can affect different investments at different times.

Rebalancing — If diversification and asset allocation are to work properly, we need to regularly review and sometimes rebalance your portfolio. This is because, over time, your asset mix may have drifted away from your targets. For example, a period of strong growth in one industry or sector may be a signal that some funds should be redeployed to another area to get you back in balance. No matter how promising the outlook of any company, industry or asset class, maintaining appropriate balance according to your risk levels should be a priority, which may mean pruning or other adjustments.

Regular Reviews Are Important

Seasoned investors know that regular reviews are important. While investment performance is one focus, understanding how personal circumstances or goals may have changed is important as they will drive your investment plan. We want to ensure that all of your assets are working together to achieve the future you want.

The components of your investment plan continue to work hard for you behind the scenes. While sometimes easy to overlook, have confidence that they continue to support your investing success. For a deeper discussion, please call the office.


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