Sticking to a financial plan keeps emotions in check as investment returns fluctuate, says Santa Rosa wealth expert

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Matt Davis

First vice president, resident director and wealth management adviser

Merrill Lynch – Smith Davis Group

90 S. E. St., ground floor, Santa Rosa, CA 95404

707-575-6324

Read more tips on and coverage of wealth management.

Matt Davis is first vice president, resident director and wealth management advisr with Merrill Lynch, Smith Davis Group in Santa Rosa. Davis answered Business Journal questions about wealth management.

What difference does age of a client make in what you suggest to them as an investment strategy?

Time horizon and liquidity needs are critical components in determining a client’s unique investment strategy and asset allocation. Generally speaking, a younger client who is investing for the long term has time to ride out market cycles and can afford to take more investment risk than a retired client who needs income and stability.

The job of a young investor is to accumulate assets; the job of a retired investor is to prudently use accumulated assets to support cash-flow needs. For that reason, the strategy for a retired client is typically more defensive than for a younger client. Even for retired clients, however, it is important to incorporate growth aspects into an investment strategy to keep up with inflation and avoid a depletion of portfolio assets.

Finally, clients have different tolerances for risk regardless of their age and it is important for our investment team to have a good understanding of this unique aspect and to incorporate it into the investment strategy that we develop.

How do you help a client determine what level of risk they are comfortable with when it comes to investing their money? Are there key questions you ask to assess that risk?

The accurate assessment of risk tolerance is probably the most important challenge we have with each of our clients.

We have a set of questions that we work with but in many cases the most important information is gathered during free-form conversations. Risk is an inherent characteristic of every investment strategy. We have learned that clients often believe that they have more tolerance for risk than in fact they do.

Behavioral research tells us that the psychological impact of losing money is significantly more powerful than making money. There are personal factors, age factors, cash-flow need factors, life-circumstance factors and market factors that should be evaluated periodically for each client in light of the risk they are taking with their investments.

With faster technology, algorithms to pick stocks and instantaneous investments, are clients making more frequent moves with their money, not being content to stay with investments for the long haul? What do you tell them if you consider this approach unwise?

Most of our portfolios are managed on a discretionary basis, which means that we are building and managing investment strategies and portfolios. We are making the buy and sell decisions. High frequency trading and algorithms have increased daily market volatility to some degree, but our strategy hasn’t been affected by it. We have a highly disciplined approach and have developed a base of great clients who are in it for the long-term. For the most part, our conversations are focused on larger, personal issues, not on minute-to-minute market movements. Having a comprehensive financial plan in place is a key component in staying the course and managing one’s emotions during these periods of volatility.

What mistakes do you see individual investors making in the current financial climate?

It is our job to keep our clients from making mistakes. When evaluating the broader investment landscape, we observe that individual investors are frequently increasing their financial risk in the following ways:

Matt Davis

First vice president, resident director and wealth management adviser

Merrill Lynch – Smith Davis Group

90 S. E. St., ground floor, Santa Rosa, CA 95404

707-575-6324

Read more tips on and coverage of wealth management.

CHASING YIELD: We see many investors overly focused on income or yield to achieve their cash flow needs as opposed to a total return approach. This can be dangerous in a low interest rate as in many cases it requires one to take on more credit risk and duration) risk to achieve their income or yield goals.

DIVERSIFICATION: Many investors have become complacent about risk and, in many cases, have forgotten about the 2008 financial crisis.

SUSTAINABLE WITHDRAWAL: We see a lot of investors overspend in retirement. A 10-year bull market has given investors a false sense of security as to what is sustainable long term in terms of draw-down from their retirement’s assets.

What is your best advice on planning for a financially secure future?

Find a good book that addresses saving and retirement. My partner frequently recommends The Only Investment Guide You’ll Ever Need, by Andrew Tobias. It was originally published in 1978 and has been updated over the years. Utilize your retirement savings options. Manage your savings and spending. Stay away from revolving credit card debt. Create a fund for unanticipated expenses and keep the assets liquid. Evaluate your career and make changes if you are unhappy in your work. This is easier said than done, but important. There is not a high correlation between misery and success.

If you decide to seek professional advice, find an adviser that you trust and like, and make sure that the adviser provides comprehensive financial planning as an integral part of an investment relationship.

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