Understand, commit to a portfolio strategy to avoid the noise

Too many investors focus on the day-to-day noise coming from the markets, scrutinizing the minute-to-minute data points and economic news, often to their detriment.

“At the end of each day, headlines will proclaim which factors moved the market up or down — ‘profit taking’ or supposedly hungry investors ‘buying the dips,’” says Daniel Roe, Chief Investment Officer at Budros, Ruhlin & Roe, Inc. “The fact is, on most days it’s impossible to pinpoint precisely what types of investors were buying and selling, and why exactly the market moved one way or the other.”

For long-term investors, he says such volatility is simply noise that contributes nothing to the conversation about successful investing and building a durable long-term portfolio strategy.

Smart Business spoke with Roe about overactive investors and implementing strategies that make more sense in the long run.

What should investors consider as they develop an investment strategy?

In managing a portfolio to meet investment goals, there are certainly more than a few strategies that can work to achieve the desired objectives.

The single most important feature of a strategy is that it will be durable over long periods of time, meaning the investor can stick with it during good and bad times. For example, investors who bailed out of whatever strategy they were using in 2008 after equity markets fell more than 50 percent likely missed out on the dramatic rise that occurred after the first quarter of 2009.

A portfolio’s exposure and allocation to higher risk investments that offer higher return potential, like stocks and private investments, should be relatively static over a period of many years, subject to true changes in the investor’s personal circumstances. That might be described as a 60/40 allocation, or perhaps as a range of allocations, say 50 to 70 percent, depending upon the relative valuation and opportunity offered over time.

When stock valuations are relatively low, a portfolio strategy might command a higher weight to these riskier, higher returning investments. However, when valuations are relatively high, then the riskier allocations might be brought down.

When it is difficult to discern whether stock valuations are on the high side or low side, investors can keep exposures close to the middle of the range, or at a neutral allocation. Such a valuation-based, risk-sensitive approach to a portfolio strategy can be made durable over time, as it does not require an investor to determine whether or not one day’s worth of news or a 1 percent movement in stock prices is worth reacting to.

The noise from a few days of activity can largely be ignored. If those days multiply, like they have in 2016, providing movements of 10, 20 and up to 50 percent in some sectors, then further consideration of assets’ valuations should be assessed once again.

When should a strategy be established and how will investors know it’s the right strategy for them?

An investment strategy is determined as a portfolio is established; at any transition point in life, such as retirement or divorce; or simply at the beginning of a new relationship with an adviser. Review the performance results over a period of a few years and compare them to the goals set at the start. If performance meets expectations, there’s probably no need to change.

How can investors keep from making knee-jerk investment decisions?

Investors who find they’re trading because of a headline or market move, or calling their adviser because of what happened over a day or two, are letting emotion guide their decision-making and that leads to trouble. It’s better to review performance on a quarterly basis and make larger portfolio decisions at unemotional times.

The investment strategy should be revisited annually. Think about the asset allocation and risk in the context of what’s changed relative to job, income and balance sheet wealth and make adjustments where appropriate. This is a multiyear decision, so don’t make it based on a week of market performance.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.