In Volatile Times, Consider Time Horizons
Written by Ryan Anderson, Private Wealth Advisor, and Blake Mankin, Financial Planner,
in Blue Trust’s Houston, Texas office
In times of economic volatility, we encourage investors to remember these truths:
- God is in control.
- Contentment is not determined by the markets.
- An impulsive decision can have long-term implications.
- We’ve been here before, and we’ve made it through.
We also counsel our clients to consider their investment time horizons. When the economic news seems negative, it is often easy to lose sight of your long-term goals and focus on what feels like an emergency today. Short-term volatility can cause anxiety and make it more challenging to plan wisely because the temporary discomfort creates uncertainty. As a result, you may question, or even abandon, your long-term planning.
When navigating volatility, there are two important questions to ask yourself:
- What is the purpose for this wealth?
- When will I need it?
Why you need money is important.
Saving money without a purpose makes it difficult to determine a wise stewardship strategy. For example, if you plan to purchase a new vehicle this summer, you need to have cash on hand in the next few months. However, if you are planning to pay for your young children’s college education down the road, then you have more flexibility because you have more time to meet that need.
Defining why you are saving—for what purpose—helps identify what options you have to save and invest. Then you can determine when you will need the money to achieve a particular goal.
When you need the money matters.
Many investors are saving money for goals that are days away but also for ones that are decades in the future. Time horizons are important in determining how you invest because you must maintain liquidity for short-term goals while focusing on capital appreciation for long-term goals.
Without prudent planning and matching your allocations to different time horizons based on your goals, current volatility could jeopardize your short- and long-term objectives. For example, if you do not have enough liquidity to meet short-term goals, an economic downturn may necessitate selling investments at inopportune times before they have had a chance to recover.
With proper strategy and a well-diversified portfolio, you can patiently weather unexpected markets and expenditures without making reactionary changes and still meet your long-term goals.
Time-based portfolio construction can help weather the storm.
With a time-based strategy, your portfolio is designed to meet your specific cash flow needs. Short-term needs are invested to maintain principal and minimize the impact of volatility while long-term goals are invested to meet return goals and outperform inflation. The purpose and time horizon of the funds determine where and how resources are invested.
Typically, we encourage a short-, intermediate-, long-, and sometimes ultra-long-term time horizon based on your goals. Practically speaking, short-term cash flow needs are generally invested in vehicles less prone to volatility, such as bonds, money market accounts, and CDs. Funds for long-term goals are invested using assets that have a higher probability of growth, such as stocks, real estate, and commodities.
What factor does volatility play?
Using a time-based portfolio to match your goals with their respective time horizons does not guarantee that volatility will not affect your portfolio, but it may help you stick to your financial plan and remain at peace during uncertainty. Having your short-term goals covered by lower-risk assets and knowing that your long-term investments have time to recover can provide greater financial peace of mind.
Partnering with a financial advisor who walks beside you with a time-based strategy can help you navigate times of uncertainty. If you would like to discuss having a diversified strategy in place for your investments, please contact us at 800.987.2987 or email blog@bluetrust.com.
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