Know Your Investing Style

Most people invest because they know they are supposed to. Few take the time to figure out exactly why they invest. What your goals? Retirement, owning a home, investing to have assets to pass on to your children? Knowing what your reasons are determines your Time Horizon – the length you want to be invested in the market or the length of time before you’ll want to withdraw some or all of the funds invested.

The 2^nd factor in determining your investment style is your ability to hold investments through market downturns. Your single, best investing tool is the will to hold stocks when they are falling. This is key to long-term investing. Many have a hard time sticking with their strategy because they don’t know how much volatility to expect.

All assets fluctuate in value. How you invest determines the level of volatility you can expect. The goal of this newsletter is to help you understand different investing portfolios, what their objectives are, and how your investing goals may align with them.

The three investing portfolios I’ll discuss are the conservative, balanced, and growth portfolios.

Conservative

Conservative investors either have a shorter time horizon or don’t like volatility. This portfolio mix is the most protected from major market swings. The point of a conservative portfolio is to preserve capital while not falling behind the inflation rate of 3.8% (historical average). With an expected annual return of 5.75%, the conservative portfolio accomplishes that.  This investor has a time horizon of 3-5 years.

US Stock – 15%
Foreign Stock – 5%
Bonds – 50%
Short Term Investments – 30%

Balanced

This is the goldilocks portfolio, not too cold and not too hot. This investor has a time horizon of 5-15 years. Their goal is to take more risk than a typical conservative investor for a higher, expected return of about 7.45% annually. Think moderate returns with moderate market swings.

US stock – 35%
Foreign stock – 15%
Bonds – 40%
Short-term Investments – 10%

Growth

This style of investing is for the people who have a longer time horizon or desire the best chance at high returns in the market. These investors have a time horizon of 15 years or more before they need to withdraw funds from their portfolio. With expected annual returns of 9.45% (the highest of the three portfolio mixes) there is also expected market swings. Any growth investor must understand the volatility of the market and be able to stomach a 50%+ loss within a year. Even with knowledge, this can still be difficult. Everyone claims the ability to hold during downturns but very few actually do.

US stock – 60%
Foreign stock – 25%
Bonds – 15%

The table below evaluates the performance and volatility these portfolios experienced from 1926-2022. Notice the relation between the average return and the worst 12-month return. The higher the average return, the more severe result for the worst 12-month period.

Wise investing is focused on the average of the portfolio. Not the constant, typical focus on short-term results.

_{Source: Fidelity Investments and Morningstar Inc. Data is from 1926-2022. Past performance is not a guarantee of future results.}

The primary factors are how long you want to be invested and how comfortable you are with market swings. Be mindful the market swings are not avoidable! You can just invest in a way to mitigate the swings to your level of comfort.

Choose your own investments based on your particular objectives and situation.