The traditional approach for most has been to have a mix of growth assets, such as equities (stocks and shares), and defensive assets, such as bonds, within their portfolio.
New research is challenging this approach.
What does the research say?
The research looked at the returns of various assets from 1890 to 2019. It suggests a diversified investment portfolio of equities may work better for an investor than a mix of stocks and bonds. This holds true regardless of where you are in your investment journey. You could be nearing retirement or just starting out in your investment journey.
The Role of Human Behavior
There is a crucial aspect to consider when investing in an all-equity portfolio. While mathematically, it might be a superior choice, human behaviour often plays a significant role. Investors may struggle with the volatility associated with equities, leading to poor timing decisions and significant gaps between their returns and investment returns.
Therefore, it’s crucial to consider the behavioural aspect and understand your risk tolerance, capacity to endure short-term declines, and past reactions to market volatility. These factors can significantly impact your ability to stick with an investment strategy, especially during turbulent times.
How Can a Financial Planner Help?
A financial planner can help bridge the gap between theoretically optimal investment strategies and what works best in reality. They can assist you in:
Understanding Your Risk Tolerance: A planner can help you gauge your comfort with risk and volatility through assessments and discussions.
Customizing Your Investment Plan: Based on your risk tolerance, life goals, and financial situation, a planner can develop a tailored investment strategy.
Behavioral Coaching: Perhaps the most crucial role of a financial planner is to provide guidance and support during market fluctuations, helping you stick to your long-term investment plan.
Regular Reviews and Adjustments: Your financial situation and goals can change over time, and a planner can help adjust your investment strategy accordingly.