When it comes to investing, there is no shortage of strategies. Through a variety of resources from books to television to online, potential investors are inundated with information on the topic.
The trick for any investor is how to turn that overload of investing information into a long-term investment strategy that will allow them to achieve their financial goals. For most people, those goals include paying for their children’s education and their own retirement.
Before beginning investing, most executives and employees have to decide what they are planning for. While there are any number of investment approaches, advisors focused on several key strategies to improve long-term results.
“Usually, the questions I get are, will I have enough [money] to retire, or, how much money will I need to retire?” said Brian Loy, a financial advisor with Sage Financial Advisors Inc.
Loy added that one thing is sure, “you’ll need more money than you think you will.” He also attributed the increased cost of retirement to people living longer.
According to Loy, on average people are living 30 years after they retire. With $2 million saved and living off 4 percent annually. That amounts to an income of $80,000.
“At 65, most people will live for three more decades,” Loy explained. “That’s a long time. Maybe you need to work to 68 or 70 instead of 65.” Loy said part of any comprehensive investment strategy is knowing “if your goal is out of reach, you’ll need to adjust your expectations.”
Among the many investment strategies is market timing. Simply defined, when an investor should get into the stock market, or maybe sell some shares or exit a fund.
Is it a popular strategy with financial advisors? No, but many times market timing is driven by investor fear. Whether the market is experiencing a downward trend and investors want to sell their shares, or finding an investment that has outperformed the market and buying at its peak.
Loy stressed that an investment strategies should, “not be driven by the market, but by what you need.”
Market timing is an attempt to buy low and sell high. However, it’s difficult to know when the market is about to turn higher or lower. Staci Scharadin, CEO of Las Vegas-based Diamond Wealth Management, explained that, all too often, it’s difficult for investors to know when the market is reaching its peak, followed by the inevitable sell off and steep decline.
“Investors who try to time the market may have success in the short term,” said Scharadin. “But, over the long term, it is a difficult strategy to be successful with.”
Mitigating Investment Risks
Advisors also urge their clients to review their asset allocation. Asset allocation is simply a strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in a portfolio.
For example, a typical portfolio may be 60 percent invested in stocks, 20 percent in bonds and 20 percent in alternative investments.
“For a 50-year-old executive with a Las Vegas company, typically they are still investing for retirement,” Scharadin said. “They might want to look outside the market, use alternative investments. These are investments not tied to the emotional ups and downs of the market.”
Scharadin said these alternative investments, which some call non-traded investments, include business development corporations, venture capital, private equity, hedge funds, real estate investment trusts, as well as real assets such as precious metals, rare coins and art.
These assets usually perform with low correlation to stocks and bonds, and are generally more illiquid than traditional investments. Liquid alternatives include ETFs, or an exchange traded fund and mutual funds that are traded publically.
“Because alternative investments are assets that are usually not correlated to the stock market, you’ll see the use of self-directed IRAs and allocations to alternative investments rise,” said Theresa Fette, CEO of Provident Trust Group in Las Vegas. “We have seen increased investments in rental real estate and private companies mostly in the last year.”
Fette said her company is specifically seeing a growth of investments in first deeds of trust and private companies in Nevada. But what are the various risks investors take when investing in alternatives and do the risks outweigh the rewards?
“There is risk in all investments,” Fette explained. “To minimize risk, we see our clients diversifying their portfolio among a variety of assets, including traditional assets such as stocks, bonds, and mutual funds. Clients need to remember that there is usually a direct correlation between the amount of risk and the amount of return.”
Fette noted the higher the risk, the higher the return. She also cautioned investors to do their due diligence before choosing an investment. In other words, if there’s a claim of 10 percent returns, don’t just jump in to make the investment.
Fette cited Bloomberg News saying the average investor realizes approximately 3.7 percent returns.
“If you can understand and appreciate the risks involved with any investment, and live with the consequences if any of those risks were to play out, that is usually a good litmus test to determine if it is too risky for you personally,” she said.
Scharadin added alternative investments are good for removing “some of the risk from the markets.” She recommended that 15 to 25 percent of a client’s portfolio be placed in alternative investments.
Scharadin noted that Yale and Harvard universities have 60 to 80 percent of their endowments in alternative investments. She said these alternative investments have “come down to the retail level,” with a minimum of $5,000 invested. Demand for alternative investments stems from investor appetite for lower volatility and diversification. Another reason is the fact that regulatory and financial barriers that kept many small investors away have been relaxed in recent years.
For years, these investments were primarily available to institutional investors or the very wealthy because it meant setting aside large amounts of capital for a very long time. Now there are options with lower minimums such as mutual funds, as well as hedge funds that allow investors to withdraw cash more frequently.
Investment Strategies That Work
Other keys to success include investing early and separating emotions from objectives. Those strategies should include investing in things that are familiar. For example, if a person gambles and spends lots of time and money at casinos in Nevada, advisors will tell them to consider investing in the gaming sector or a particular company.
Another key is to start investing as early as possible. The longer money is invested, the more potential it has to grow and bring the best returns. Also, remember dollar-cost averaging, the process of investing a fixed amount of money in an investment vehicle at regular intervals, typically bi-weekly or monthly.
Scharadin urged investors to be disciplined, continue to invest over an extended period of time, regardless of prices or the ups and downs of the market.
“Don’t get caught up in the hype,” Scharadin said. “Stay on track with your contributions”. In 2008, people got scared, took their money out of the market and never came back. Then in 2014, at the height of the rally, everyone wanted to get back in.”
Loy agreed, saying discipline was key to successful investing, but so is rebalancing a portfolio. Over time, a portfolio’s risk profile may adjust due to the performance of certain investments or economy.
Despite Nevada’s ongoing economic recovery, Loy said he still “finds a lot of people rebuilding their portfolios.”
“The recession had a huge impact on their businesses,” Loy said. “For executives or employees who were laid off or furloughed during the recession, it’s time to regroup. When it comes to rebuilding your portfolio, it’s also about being aggressive. Who is saving more?”
Loy also urged investors to aggressively budget their money, or maybe even downsize their lifestyle to get a handle on their finances.
Post-Recession Investing in Nevada
After adjusting your portfolio or looking to get back into the market, what do executives need to know when it comes to investing in the post-recession environment?
“Whether you’re investing during a recession or a booming economy, it should start with a financial plan that takes your individual situation and goals into account,” said James Corey, vice president and branch manager with Charles Schwab in Southern Nevada. “Most business executives would not start a new venture without a business plan. It should be the same thing for investing.”
Corey, who oversees offices in Las Vegas, Summerlin and Henderson, admitted the global market concerns and uncertainty over when the Federal Reserve will begin to raise interest rates have created a “great deal of volatility in the market.”
“For long-term investors, which most of us are, it’s important to stay focused on the longer term and not be too distracted by shorter term events,” Corey said.
Trusting a Machine with Your Savings
There has been a lot of reports about “robo-advisors.” These automated investment services promise to make investing easy and inexpensive. Typically, a robo-advisor firm provides portfolio management online and no other financial advice, whereas financial planners with more traditional brokerage or wealth management firms provide advice on topics such as insurance, retirement and estate planning.
With a robo-advisor service, the portfolio management is provided through the use of computer models based on basic online goal and risk tolerance assessment tools.
Robo-advisors are operated by well-known brokerage firms and by relatively new names to the industry – FutureAdvisor, Beterment and Wealthfront. Schwab Intelligent Portfolios launched earlier this year.
The paperless platform is available to clients with as little as $5,000 and is free to investors. Before building the portfolio, it takes a client through a 14-question “Investor Profile Questionnaire,” which is designed to capture their behavioral attitude toward risk, which creates a risk willingness score.
Finally, users are asked questions about their age and investment product preferences, which help determine the appropriate set of portfolios.
“We think the introduction of automated investing services as an evolution in the industry, as opposed to a revolution,” Corey said. “An automated investing service like this can be appropriate for an investor who is looking for a different way to invest and who is comfortable using technology to make things more efficient.”
He described Intelligent Portfolios’ client base as half millennials or Gen-X, who are just getting started with investing, while about half are Baby Boomers and Matures. Corey said roughly 15 percent of their clients have $1 million or more invested with Schwab overall.
“Robo-advisory services will be mainstream over the next three to five years,” consulting firm A.T. Kearney concluded in a recent report. By 2020, robo advisors will manage $2 trillion in the U.S., or 5.6 percent of Americans’ investment assets up from 0.5 percent today, the report predicted.
Scharadin added that robo-advisors are here to stay but that personal service will remain important.
“Who are people going to talk to?” Scharadin questioned. “When they are scared, they want to speak with someone. In my world, I’m reaching out to those who might use robo advisors. That personal service is never going to go away.”
