Investing in 2021
Posted By Brad Walker
A new year typically brings new possibilities and new resolutions. Since many people tend to think along the lines of “fitness,” financial fitness should be a part of that view, and that was the focus of Monday’s program by club member Darryl Banks, Financial Advisor with Edward Jones.
It would have been hard to miss last week’s financial news coverage of the “David and Goliath-style” battle over Gamestop, a relatively obscure company. Risky hedge funds were shorting the struggling video game retailer while Reddit-inspired rebel traders were sending stock prices into the financial stratosphere.
For investors, however, such a twisted dynamic is “an accident waiting to happen,” Darryl said. “It’s speculation, not investing.” Investors are much better served by sticking with a proven path to financial fitness and following “Ten Rules of the Road,” which Darryl outlined during his program.
- Develop a strategy, a roadmap for how to reach goals. Darryl always asks investors, “What do you really want out of retirement?” and then helps them determine how to make that happen based on long-term goals, how much time is needed to get there, and their comfort level with risk.
- Understanding risk. Risk and reward go hand in hand: the higher the return, the greater the risk, Darryl noted. How much risk can an investor afford or tolerate? Identifying that risk level is a key step.
- Diversification or asset allocation. A portfolio is built to meet investors’ goals. Allocating assets across diverse investments take some uncertainty out of the market, thus providing greater potential to meet the desired outcomes.
- Stock quality. While one of the most important factors, stock quality is often overlooked, Darryl said. As opposed to speculation, such as the Gamestop phenomenon, investment looks at a company’s performance. He reminded members of the adage: “If it sounds too good to be true, then it probably is.”
- Investing for the long term. Another common mistake made by individual investors is trying to “time the market,” which Darryl described as a “trading behavior,” a short-term action instead of a long-term application. For example, in March 2020, the stock market had experienced a 35 percent drawdown. Worried investors asked: what do I do? Darryl’s response: “Avoid the noise. Don’t take a short-term reaction for a long term goal.” That advice proved wise, as the markets have now largely recovered. However, he cautioned that “buy and hold” doesn’t mean “buy and forget.” Sometimes selling is needed, but be sure to sell for the right reason.
- Have realistic expectations. With a bull-market that lasted 11-years, newer investors may not realize that double-digit returns are “not the long-term norm,” Darryl said. Return expectations should be based on asset allocation. Thus, a diverse portfolio should not be measured against the S&P, an index that reflects only the performance of 500 large companies listed on US stock exchanges. Instead, remember that returns average out over a longer period of time. Some years are winners, some years are not, Darryl observed. Regardless, readjusting and rebalancing assets over the various classes is a good idea.
- Prepare for the unexpected. Life happens, and so much can’t be predicted. Therefore, Darryl recommended that everyone have an emergency fund to weather critical situations.
- Plan for the estate. As one nears retirement, protecting assets becomes important, as they will be a source of retirement income. As one gets closer to the end of life, protecting the legacy may be the priority. Member Jack Derrick, a retired attorney, encouraged members to take steps regarding wills, power-of-attorney, medical power of attorney, etc. He offered to answer basic questions if needed by members.
- Focus on what can be controlled; don’t be distracted by headlines and let emotions control investment decisions. Investor reactions often prevent reaching long-term goals, Darryl said.
- Review strategy regularly. Change is inevitable, so an annual review with an advisor is always a good idea, allowing investors to make small adjustments as needed.
Thank you, Darryl, for a timely and enlightening program!