Youth can be helpful in taking on investment risk — when there's time to adjust, says Mill Valley wealth adviser
James Lanczowski is a research analyst with Private Wealth Partners in Mill Valley. Lanczowski answered questions about wealth management from the Business Journal.
What difference does the age of a client make in what you suggest to them as an investment strategy?
Determining asset allocation based on age is a good starting place, but with longer life expectancy and low yields the standard “100 minus your age” asset allocation rule of thumb must be adjusted. Fixed income certainly plays an important role in portfolio construction, but it now provides greater risk with less return. The main goal is to reduce risk in the portfolio as a client approaches retirement.
Young people are often too risk averse. They should have relatively aggressive portfolios because they have a long time to compound assets and recover from downturns.
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?
It’s important to understand the client’s complete financial situation when helping to determine their risk appetite. Understanding their future lifestyle expectations and goals is key. Understanding these goals is best done earlier rather than later to allow for a course correction if needed.
It is extremely important to help clients understand how much they need to save, and how much investment risk they need to take while still working, in order to meet their retirement goals.
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?
We are long-term investors at Private Wealth Partners. Long holding periods are even more important for our clients in the age of these short term strategies. Most of our clients have been market participants for a long time, and they have experienced many market cycles. They understand the importance of holding positions in high quality, growing businesses over the long haul.
What mistakes do you see individual investors making in the current financial climate?
In the current climate it is important to base decision making on concrete data and facts in order to stick with the investment plan. There is great potential for making emotional decisions that might have a negative impact on investment performance. Seeking professional help from a fiduciary is a great way to avoid making these mistakes.
Reaching for yield is also a problem. Lowering the credit quality, relying on credit ratings to inform fixed income investment decision making, extending duration, and investing in complex levered products all increase risk.
Another mistake is forgetting to “buy low, sell high.” Ignoring the rhetoric and focusing on the facts makes this much easier to do.
What is your best advice on planning for a financially secure future?
Investors should identify their goals, make a plan and remain disciplined to meet the goal. The key to a financially secure future is sensible budgeting and disciplined investing.