Welcome back to our series of blogs on Blind Spots! We all have Blind Spots, things that are potentially hazardous that we don’t even see, things that we should know, or have awareness of, but don’t. This series of blogs focuses on common financial Blind Spots that we see when working with our clients.
Most likely, you probably have investments that are earmarked for a specific goal, such as retirement, college funding, house down payment, second home, car purchase, etc. When determining the appropriate investment strategy, we always determine the client’s investment time horizon, which is the time between now and when the goal is completed. Or another way to look at it is this: the time between now and when you need to sell an investment to fund a goal.
The reason investment time horizon is important is because different investments behave differently. Historically, long term returns for cash are lower than those for bonds which in turn are lower than those for stocks. Historically, volatility associated with cash is lower than that for bonds which is in turn lower than that for stocks. An investor who doesn’t need money for decades can own a portfolio with more volatility when compared to someone who needs the money next week. The reverse also holds true. An investor who needs money sooner is more subject to the risk of volatility and probably should own fewer volatile investments. Remember…the longer the investment time horizon, the smaller the risk of loss.
So, we have established that investment time horizon is a key concept, part of the foundation when trying to decide what kind of investments you should have in your portfolio.
Here are the two Blind Spots that we see all the time. First, investment time horizon changes. For example, if you invest money to fund college for one of your children, your investment time horizon shortens as your child ages and gets closer to college age. Hence, your investment strategy needs to change as you get closer to withdrawing funds to pay for their college bills.
The unexpected result of not acting on this change in investment time horizon could be a mix of investments that is too volatile and may be significantly down in value when needed.
Second, and this is a big one…as most people are approaching retirement, they often mistakenly believe their investment time horizon shortens. As an example, someone currently age 63 planning to retire at age 67 might believe that their investment time horizon is only 4 years. Not so, unless they plan to sell all of their investments when they turn 67. For most people in this situation, their investment time horizon is still long (more than 10 years) because they intend for their investments to generate income for a lifetime. Sure, they may have liquidity needs beginning at age 67, but that doesn’t change their investment time horizon for most of their retirement funds.
The unexpected result of mistakenly reducing investment time horizon too early could be a mix of investments that won’t provide a return high enough to generate income for a lifetime. And, if you are unlucky enough to run out of money, it will be too late for you to do anything about it!
At Second Half Strategies, we try to identify and help you uncover your various financial Blind Spots. Our Wealth Management process includes Planning, Guidance and Advice. By following our process, you should have the confidence to know that you are taking proactive steps to uncover and eliminate your Investment Time Horizon Blind Spots!
What process are you using to find and address your Blind Spots?