By Tim Courtney, Chief Investment Officer

Ideally, every investor should periodically review their financial situation and make adjustments that maintain or improve the odds of achieving their goals. Since we don’t know the future, the adjustments they make should be about putting them in a position that improves expected outcomes. These adjustments fall into three main categories: discipline, planning, and execution.

Before we look at these categories in more detail, it’s important to discuss the topic of risk. In investing, when we minimize one type of risk, we often take on more of another, so that a certain level of risk is unavoidable. Purposely increasing overall risk exposure, say through concentration, may end up improving an outcome, but not without also increasing the odds of a catastrophic outcome. Therefore, risk management or balancing across each of these categories is necessary.

Improving outcomes begins with discipline. This is critical because markets are noisy, full of sound and fury, but often signify nothing. We might become distracted by the noise or be tempted to make changes based on emotion when markets don’t behave as we expect them to. Examples of a lack of discipline are holding excessive amounts of cash, concentrating too heavily in a single company or sector, trading excessively or trying to time entry and exit points in markets. Over time, these behaviors have shown to worsen outcomes.

Planning is a wide category but is also critical to improving outcomes. Planning entails formulating a functional asset allocation, creating a withdrawal plan and timeline, managing inflation as well as income and estate taxes, and structuring accounts with proper ownership and beneficiaries, among other work. Substantial changes to plans are usually the result of changes to personal circumstances, while short-term market conditions should normally cause relatively minor, if any, adjustments to a plan.

After addressing discipline and planning, we focus on mechanics and execute the plan. This is the blocking and tackling necessary to make the plan work. Examples of this are:

• Determining which investment structure to use (SMAs, ETFs, etc.)
• Locating assets properly (maybe stocks in certain account types and bonds in others)
• Systematic rebalancing of a portfolio
• Managing capital gain tax realization
• Knowing what you will sell and when to free up cash for withdrawals

The benefits coming from properly executing a plan can add up to a meaningful amount of extra basis points in after-tax return each year.

As we noted above, within each of these categories of activity falls the need to manage risk – which should help in achieving goals. Connect with your Exencial advisor to share your thoughts or questions on how we can work to make reaching goals more likely.

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