For many people, developing and maintaining an investment strategy feels overwhelming. You might have a good understanding of certain types of investments and a lower comfort level with others. Once you set up your portfolio, how often do you revisit your decisions? Do you make changes proactively or reactively?
For some, developing their own investment strategy is fun and rewarding. If you don’t fall into that category, working with an advisor can help you develop a strategy that helps you meet your financial goals.
Benefits of a Certified Financial Planner Investment Strategy
When you work with an advisor, you get the benefits of a trusted resource, regular check-ins, and an appropriately diversified portfolio.
Trusted Resource
Certified financial planners (CFPs) act as fiduciaries, which means that they are required to work in the best interest of their clients and comply with a code of ethics. Independent registered investment advisors (RIAs) are firms that are registered with the state and/or U.S. Securities and Exchange Commission The individuals that represent the firm, investment advisor representatives (IARs), provide advice about securities investments.
CFPs and IARs are continually educating themselves to maintain a high level of expertise, even as the market and the world change. Unless you’re committed to maintaining that same level of education, chances are you can benefit from the knowledge and skills of a CFP or IAR to develop your investment strategy and an expense budget.
Regular Communication
CFPs and IARs check in regularly with their clients—often quarterly or monthly—to provide relevant information, share performance details, ask what has changed in your life, and give you an opportunity to ask questions. This level of attention helps ensure that your investment portfolio doesn’t lie fallow when making changes could improve performance.
Diversified Portfolio
CFPs and IARs have knowledge about a range of investment types that you might not have considered. Performance metrics also change over time, so what was once a balanced portfolio might have shifted. An advisor can help you identify when it’s time to move assets around and rebalance your portfolio. They can also recommend asset classes and specific investments that you wouldn’t otherwise be aware of, such as mortgage funds or life insurance policies.
Common Approaches to a Registered Investment Advisor Strategy
Although a registered investment advisor will tailor its investment strategy to match your individual goals, there are four common approaches an RIA might use that you might not be able to implement on your own with the same level of success.
Market Capitalization
Invest in assets based on market cap size—large, mid-cap, or small cap. This can be done by either choosing stocks, investing in mutual funds, or investing in an exchange-traded fund/index fund. Have a mixture of equities that cover a spectrum of large-, mid-, and small-cap size as well as fixed income that covers a spectrum of short, medium, and long duration. Historically, fixed income is the safer component, so make sure you do your homework on the credit ratings of the debt you invest in—or at least understand the risks you are taking. There are "risky" ways to invest in fixed income, as many learned this past year. “Interest rate” risk can impact even AAA-rated fixed-income investments!
Lifestyle Immunization
With this approach, the goal is to keep enough capital so that you can continue to maintain your lifestyle or meet a specific financial milestone, such as saving for college tuition or retirement. Investments are made based on the timing you expect to need the cash flow. This strategy is a good fit if you have extra resources to invest and is typically weighted toward assets that have more stable returns, such as bonds and mortgage funds.
Risk Parity
The goal of a risk parity strategy is to balance risk across the entire portfolio so that when some assets are not performing well, others help fill in the gaps. This is a good fit for investors who want to be more resilient to market volatility. It’s often a good idea to find investments that are likely not correlated to your personal income or the broader markets. Consider alternative investments such as real estate, private equity, mortgage pools, or other alternative investments that are typically less correlated to public markets.
Valuation-Driven
This is a more active approach to investment that requires buying low and selling high. Doing this successfully requires active attention to the market, ongoing research, and deep knowledge of how investments typically perform. These are often best done through either mutual funds or hedge funds. Keep in mind the expense ratios and know how much you're paying the manager.
Building a Resilient Portfolio Through Hard Money
If all this talk of investment strategies still sounds like Greek to you, consider working with a certified financial planner or registered investment advisor. Certified financial planners and registered investment advisors can help you determine if including investments in hard money loans is a good fit for your portfolio.
