The summer’s headlines grew increasingly shocking:
- Malaysia Airlines Passenger Jet Shot Down Over Ukraine
- Israel Steps Up Airstrikes as Gaza Buries Dead
- U.S. Warplanes Strike ISIS in Iraq.
The violence and instability, along with worries about the Federal Reserve ending its market-bolstering stimulus and raising interest rates, precipitated a negative return in July for the Dow Jones Industrial average, the first decline in 2014. Should you be taking steps to protect your portfolio?
If the recent geopolitical events have made you uneasy about the possible effects on your portfolio, now might be a good time to evaluate the real risks you are taking. You have to allocate your assets to avoid Undue Risk which will help protect your portfolio through the inevitable wars, natural disasters, recessions and depressions that will occur. That’s right – not if, will. A well-diversified portfolio provides peace of mind.
Here are some tips for weathering today’s troubles—and those to come in the years ahead:
- Ensure your portfolio is diversified. Modern Portfolio Theory, developed by Nobel Prize-winner Harry Markowitz, tells us that 90 percent of the return in your portfolio is based on the allocation of stocks, bonds and cash. The percentages you allocate between these asset classes is far more important than timing the market or chasing around for the best manager, hedge fund, gold/commodities, dividend paying stocks or whatever Wall Street’s next pitch is.
- Steer clear of active portfolio management. Trying to outperform the markets involves active trading, which can have great impacts on your portfolio’s net return. With active management normally comes high management fees and high portfolio turnover, which lead to higher taxes and transaction costs, potentially leaving Wall Street and the IRS the biggest winners! World-class investment management must rise above the noise from Wall Street and day to day news headline.
- Never make financial decisions based on emotion. Individual investors tend to buy and sell based on the emotions: greed and fear. When the markets are up, they tend to buy, hoping to catch a piece of the rise, yet when markets are losing, fear sets in and investors sell. Investing with emotion often leaves investors wondering why they are overweight in growth investments before a market drop and subsequently why they were out of the market when it recovered.
Be sure that you and your investment advisers are qualified to understand and test the volatility and risk consequences your portfolio faces before the next big bad event happens.
Chris Snyder and Haitham “Hutch” Ashoo are co-founders of Pillar Wealth Management LLC of Walnut Creek, California, specializing in customized wealth management advice to affluent families. Get their white paper, Intelligent Investing: Making Smart Investing Decisions in Today’s Volatile Market, at pillarwm.com.