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9 Essential Considerations for a Holistic Investment Strategy

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Navigating the world of investments can be complex. However, you do have the ability to keep it simple and still successfully reach your financial goals. Whether you’re saving for retirement, already in retirement, saving for your grandchildren’s college education, or any other financial milestone, the key to investment success lies in thoughtful planning and strategic decision-making. In this post, we will walk you through 9 essential considerations for a holistic investment strategy. 

holistic investment plan

1. Understand Your Goals and Objectives for Your Money

Your investments serve as a means to achieve your financial goals. To ensure an holistic investment strategy, it’s crucial to have a clear objective in mind when allocating funds to specific accounts. For accounts such as your employer retirement plan, like a 401(k), and an Individual Retirement Account (IRA), the purpose of these accounts are evident – these are designated for retirement savings.

On the other hand, when it comes to a brokerage account, you have greater flexibility in defining your financial goals within this type of investment account. You might use a brokerage account to save for planned major expenses such as a home down payment or car. Alternatively, you could be setting aside funds for your children’s or grandchildren’s college education. Another possibility is when you have maxed out your contributions to retirement accounts like the 401(k) and IRA, and you’re seeking additional retirement savings options, such as a brokerage account.

Remember that investing extends beyond mere wealth accumulation. While growing your wealth is undeniably important, it’s equally essential to have a specific objective for your investments. Investing without a defined goal is much like getting into the car without a destination in mind. 

2. Assess Your Time Horizons: When Do You Want to Use the Money?

Now that you have a clear understanding of your investment objectives, it’s likely that each goal comes with a specific time frame (or at least an educated guess for when you would like to spend the money). For example, investing for a short-term goal, such as a home down payment within a year, will differ significantly from investing for a long-term goal, like your grandchildren’s college education in 15 years.

For a down payment on a home in one year, you may have your funds set aside in cash in an online high-yield savings account. Meanwhile, when saving for your grandchildren’s 529 college fund over a 15-year period, you might consider a more aggressive investment approach, such as an allocation of 80% stocks and 20% bonds, for example.

Having a defined time frame for your investments makes your holistic investment strategy considerably clearer, whether it leans towards a conservative approach, like an online high-yield savings account, or a riskier one, involving a higher allocation to stocks. 

Daily ups and downs of the markets only really matter for short term investments

If you have been following the news lately, you’ve likely noticed a lot of red numbers indicating losses in reference to the U.S. stock market performance. The S&P 500, which is the index that measures the performance of the 500 of the largest companies listed on stock exchanges in the U.S. and is one of the most widely referenced indicators of U.S. stock market performance, is down about 4.6% over the last month (from September 6 through October 5, 2023). Understandably, this may have you thinking more and more about your investment portfolio and how it’s performing, especially in the short-term.

However, if you look at the S&P 500’s performance since the beginning of the year, it’s actually up by 11.35% year-to-date (as of October 5, 2023). And if you consider the last five years leading up to September 30, 2023, the S&P 500 is up 47.15%. You’ll fare better in the stock market if you take a long-term approach measured in years rather than days.

3. Determine Your Risk Tolerance

Market fluctuations, particularly in the short-term, are inevitable. If these fluctuations are affecting your sleep due to excessive stress or prompting you to sell stocks in a panic, it may be necessary to reassess your risk tolerance. Risk tolerance indicates your comfort level in handling portfolio fluctuations and your ability to ‘stay the course’ without panicking when the market experiences a drop. It represents your willingness to adopt a more aggressive asset allocation strategy where market fluctuations are likely to occur. 

Your financial resources, investment experience, phase of life, personal financial goals and past investment experiences can all be factors that have an impact on your willingness to accept risk within your investment portfolio. 

You may have an aggressive risk tolerance where you are willing to accept high levels of risk for potentially higher returns. Conversely, you might lean towards a conservative risk tolerance, prioritizing capital preservation over substantial financial gains. It’s also possible to find yourself somewhere in between these extremes. Conducting a thorough risk tolerance assessment helps to ensure you will be able to stick to a long-term investment strategy. There are many resources available on the internet to determine your risk tolerance, including Vanguard’s Investor Questionnaire.

4. Review Your Asset Allocation 

Asset allocation is the process of deciding how to divide your money amongst different types of assets, like stocks, bonds, and cash, in order to achieve your financial goals while managing risk. It’s essentially like creating a financial recipe for your investments. The objective in building an asset allocation model is to determine what investment categories will be used and the appropriate percentages for each asset class. 

An understanding of the asset allocation of your total portfolio, and not just one individual account within your portfolio, is imperative. For example, if you decided your investment portfolio asset allocation should be 60% stocks and 40% bonds at retirement, a $600,000 IRA made up of 60% stocks and 40% bonds and a $250,000 401(k) account made up of 100% stocks will throw off your target asset allocation for your portfolio. Instead, you would have an investment portfolio allocation of 72% stocks and 28% bonds.

Also, when you are adding your investment accounts into the NewRetirement Planner, you should be thinking about the mix of stocks, bonds and cash in each account in order to enter an appropriate rate of return assumption. Your after-tax account with 100% equities will likely have a different set of rate of return assumptions than your 401(k) that is made up of 80% bonds and 20% equities. This article from NewRetirement’s Help Center further discusses how to enter an appropriate rate of return in your plan.

5. Understand Your Investment Style 

There are fundamentally two styles of investing:

Active Management: Active management consists of investors who are looking to beat the market through targeted investing, timing the market and any number of strategies that seek higher than average returns. However, it is important to note that if you believe markets are efficient, then it’s very difficult to beat the market for a sustained period of time.

  • As an active investor, you may have a lot of individual common stocks or actively managed mutual funds within your portfolio. Actively managed funds are funds with portfolio managers that select investments that seek to outperform a benchmark.

Passive Management: Passive management consists of investors who are just trying to capture the returns of the market while keeping costs low. There is a huge amount of data that shows the lowest risk approach to achieving long-term wealth is to be a passive investor.

  • The investment portfolio of a passive investor may consist of index funds and/or ETFs (Exchange-traded funds).

A review of your portfolio will allow you to determine if you are more of an active or passive investor, which sets the stage for which types of investments you ultimately choose within your portfolio.

6. Know What You Are Paying in Investment Fees

Along with the investment style and types of investments, you’ll want to be aware of your expense fees of the funds you are invested in within each account. The expense ratio is the cost of owning a mutual fund or ETF.

If you’re an active investor, your expense ratio will likely be higher since fund managers constantly shift around their stock and bond holdings to try boosting returns.

Meanwhile, the benefits of being a passive investor include the low costs of investing in index funds and ETFs. According to the Investment Company Institute (ICI) 2022 report “Trends in the Expenses and Fees of Funds, 2022”, the average expense ratio for actively managed equity mutual funds was .66% in 2022 vs. the average expense ratio for index equity mutual funds of .05% and average equity ETF expense ratio of .16%. 

7. Manage Your Re-balancing Strategy

Re-balancing your portfolio involves making periodic adjustments to your investments to maintain a desired mix of assets, such as stocks, bonds, and cash, in order to align with your financial goals. Essentially, you are realigning your portfolio with the initial asset allocation you determined as suitable for your unique financial situation and risk tolerance, such as having 60% in stocks and 40% in bonds.

It could be beneficial to establish a re balancing strategy you feel comfortable with and can execute easily. For instance, you may implement a calendar-based approach, re-balancing at specific times like every January or when you complete your tax filing in March or April. Identifying a consistent calendar period to re-balance your investments, whether it be quarterly or annually, can be a helpful guideline if you are managing your own portfolio. To illustrate, let’s say you decided initially to have a 50% stock and 50% bond portfolio asset allocation in January 2023. You prefer to re-balance your portfolio every January. A year later, in January 2024, your portfolio is now 55% stocks and 45% bonds. You would sell 5% of your stock portfolio and buy 5% of your bond portfolio. 

Another commonly used approach is the tolerance band method, which involves setting a percentage range around the target allocation of a portfolio to determine when re-balancing is necessary. Re-balancing occurs if the weight of any portfolio component deviates from its target weight by more than the specified tolerance. For example, with a 5% tolerance band, a portfolio targeting 60% in equities and 40% in bonds is re-balanced if the portfolio weight of equities either exceeds 65% or falls below 55%.

Periodically re-balancing your portfolio allows you to manage portfolio risk and reinforces your commitment to a long-term holistic investment strategy.

8. Diversify Your Tax Buckets

The importance of diversifying your investments by asset type and sector is mostly well understood, but tax diversification across your investment portfolio can be just as valuable for the success of your long-term financial plan.

It’s necessary to understand the taxation of the different types of accounts in your investment portfolio. These are often referred to as “tax buckets”. Your taxable accounts might be an individual or joint brokerage account and an online high-yield savings account. Your tax-deferred accounts might include an employer retirement plan, like a 401(k) or 403(b), and an IRA. Your tax-exempt accounts may include a Roth IRA or Roth 401(k). 

Diversifying your tax buckets allows for more flexibility in retirement when it comes to a strategic withdrawal plan. Also, it allows for a better asset location strategy, where you can hold tax-efficient investments in taxable accounts and income-producing assets or assets distributing large capital gains in tax-efficient accounts, like IRAs or Roth IRAs.

9. Mitigate Concentration Risk

Concentration risk occurs when you have too much of your money tied up in a single asset, investment type, or a particular sector. Generally, this is often seen when you are investing in individual company stocks or a particular type of fund. The risks are that if the asset or sector performs poorly, your entire portfolio could suffer significant losses. 

Diversifying your investments across various assets helps reduce concentration risk by spreading your money across different types of companies. This can potentially minimizing the impact of a poor-performing investment on your overall investment portfolio. A good rule of thumb is to try to avoid having any single investment or asset represent more than 5-10% of your total portfolio value. 

A Holistic Investment Strategy Is Just One Part of a Comprehensive Financial Plan

As you can see, effectively managing your investment portfolio requires some time, effort, and planning to ensure long-term success. While investing is an important part of building wealth, it isn’t the only consideration. It is especially important to manage your holistic investment strategy as part of a comprehensive financial plan.

Utilize the NewRetirement Planner to build, track, and manage all aspects of your money toward the secure future you seek. Run what if scenarios with your investments. The tool can play a vital role in helping you make informed decisions about your strategies and their impact on your financial security. 

Need additional support or guidance about your investments? Collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from NewRetirement Advisors to identify a holistic investment strategy tailored to your needs and goals. Set up a free discovery session.

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