Today's Advisor

Where Do Your Clients’ Investment Strategies Stand?

A three-step plan to help keep their long-term goals on track

Excerpts from Fidelity’s ‘Viewpoints’ blog urges investors to continue to focus on their goals. Reprinted with permission. Access the full article here.

Your clients may be asking themselves “Am I investing the right way for my situation?” It’s a source of anxiety or confusion for many investors in the best of times. After a chaotic year like 2020, how do they know? Consider our simple 3-step checkup plan to help find out.

1. Focus on your goals
Why are you investing? You may have some long-term goals, like retirement, and some shorter-term goals, like buying a new car or a house. The time frames around your goals, along with your tolerance for risk and your financial situation, will help determine your investment strategy. If you have a goal that is a long time away, like saving for a child’s education or saving for retirement, short-term ups and downs in the market have historically turned out to be a blip over the long term.

Let’s start with saving for college as an example for determining how much you may need to save and invest. Say you envision sending your newborn to an in-state public school and plan to cover half of the expenses with your savings (with the remaining half to be covered by a combination of scholarships, grants, and financial aid). According to the College Cost Calculator from the College Board, the total cost would be about $222,466, for which you will pay $111,233 over the course of 4 years.

Using Fidelity’s college savings calculator, we estimate you would need to save about $200 per month over 18 years.[1] Saving less per month would require a longer period of time over which to save—or a higher rate of return, which you can’t always count on.

What about retirement savings? For a 25-year-old aiming to retire at age 67, Fidelity would suggest aiming to have saved 1x (one times) your salary by age 30. By the time retirement hits, we estimate you should have amassed 10x your salary.[2]

Here’s an example—if you earn $100,000 per year as a 67-year-old, 10x your salary means you would aim to save $1,000,000 by retirement at age 67.

2. Check your asset mix
After a roller coaster year like 2020, your commitment to your investment mix may have been tested by several sharp market drops and rebounds. Year-end is a good time to check if your investment mix still lines up with your risk tolerance, time frame, and goals.

A diversified portfolio is made up of different types of investments with varying patterns of risk and return—like stocks, bonds, and short-term investments. If one part of your investment is declining, another part may be doing well, or at least not going down as much. The goal of diversification is not necessarily to maximize performance, but it may help limit the losses for the level of risk in your portfolio if the markets decline.

Ensuring that your mix of investments continues to reflect your chosen level of risk—and that the level of risk is still appropriate—is an important part of the review process. Market moves, for instance, can mean more stocks, and risk, or less than you had planned. Or you may find your allocation to bonds has strayed away from where it should be.

Check your asset mix at least once a year to help keep it on track with your objectives. If your goals change significantly—or after big moves in the market—review your investments. If your investment mix has drifted significantly from your target mix of stocks, bonds, and short-term investments (for example, by 10% or more), consider rebalancing your portfolio to your initial target mix.

A good rule for rebalancing is to first confirm that your mix is still right for you. Then if it is, consider directing more of your contributions into the asset classes that have lagged behind and reduce purchases of those that have appreciated. Consider bringing your portfolio back to the target asset mix at least annually—the habit of doing so will allow you to maintain your portfolio in a disciplined way.

3. Benchmark individual investments
You should look at your investments to ensure that they are still an essential part of your plan. Evaluate the performance of stocks, bonds, mutual funds, or ETFs by comparing them to appropriate benchmarks. The easiest way to find the appropriate benchmark index is on the stock, bond, fund, or ETF research page found under the News & Research tab on Fidelity.com.

Answer these questions:

Why did you buy this investment?
Does it still fit into your strategy? What role is it supposed to play in your overall plan? Different types of investments play different roles in your portfolio and may provide varying patterns of risk and return. For instance, does it give you more exposure to domestic bonds or international bonds, or does it target a particular style of equity investing, like value or growth?

What is impacting the performance of your investment?
How does it compare to others like it? For instance, what is going on in the world, in the stock market, or in the industry, that affects returns? Keep in mind that different types of investments do well at different times.

Are you considering performance and risk?
Look at how your fund has performed relative to the benchmark index—as well as similar funds. Recent performance shouldn’t be your only metric—consider annual performance in the context of fees as well.

Getting help with your investments could keep your portfolio in good shape to achieve your financial goals. Of course, the do-it-yourself approach works too—as long as you have the inclination, skill, or time to invest appropriately for your goals and time frame...

Risk is another important dimension—it’s important to evaluate the historical risk (variability of returns) associated with a fund’s historical return. Risk-adjusted returns can be a useful metric when comparing funds with different levels of risk and/or return. On Fidelity.com, you can find that information on the research page for each mutual fund. Click on the Performance & Risk tab and scroll down to find the section called “Fund risk and return.”
Read Viewpoints on Fidelity.com: How to start investing

Get Help If Needed

Don’t get discouraged if it seems like a lot of work—target date funds, target risk funds, and managed accounts are options to consider if you don’t have the skill, will, and time to manage your investments.

Target Date Funds

Target date funds are used for retirement savings goals and offer diversified exposure to multiple asset classes, like stocks, bonds, and short-term investments. The funds gradually become more conservative as they approach the investment goal date.

Target Risk Funds

Target risk funds also offer diversified exposure to multiple asset classes (including stocks, bonds, short-term investments). Unlike target date funds, the level of risk does not change—they are designed to maintain a consistent long-term level of risk.

Managed Accounts

These could be digital options like robo advisors that invest and rebalance for you. Or at the other end of the spectrum, managed accounts could include comprehensive financial planning with a dedicated financial advisor. Note that managed account services do charge fees—purely digital options like a robo advisor typically cost less than full-service advisory services.

Getting help with your investments could keep your portfolio in good shape to achieve your financial goals. Of course, the do-it-yourself approach works too—as long as you have the inclination, skill, or time to invest appropriately for your goals and time frame.

Whether you choose your own investments or pay someone to help you, saving and investing for your goals takes patience and consistency. Try reviewing your savings in the Planning & Guidance Center. Seeing your hard work paying off through the years as you get closer to achieving your objectives can keep you motivated and on track.

 

 

 

1. The calculator assumes indicated savings start immediately and continue until the hypothetical student is finished with school. The spending need uses today’s cost per year estimate and grows it annually by 3%+ inflation until the expense is incurred over 4 years. General inflation is assumed to be 2.5% annually. The resulting savings level varies by market conditions but the calculator illustrates the potential to meet the spending goal at the 75% confidence level. This means the amount saved meets or exceeds the illustrated savings amount in 75% of the hypothetical market scenarios (with differing market conditions). Conversely, the amount saved may fail to reach the level illustrated and in 25% of the market scenarios. The assumed asset allocation for the analysis uses three asset classes and a generic target date asset allocation appropriate for college savers.
Lastly, the underlying effective rates of return are assumed to be between 1% and 3%. As time horizons get closer to the start of college, the return assumptions are reduced to illustrate a generic target date rolldown strategy appropriate for a college savings investor.
2. The salary multiplier suggested is based solely on an investor’s current age. In developing the series of salary multipliers corresponding to age, Fidelity assumed age-based asset allocations consistent with the equity glide path of a typical target date retirement fund, a 15% savings rate, a 1.5% constant real wage growth, a savings start age of 25, a retirement age of 67, and a planning age through 93. The replacement annual income target is defined as 45% of pre-retirement annual income and assumes no pension income. This target is based on Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stat, IRS 2014 tax brackets and Social Security Benefit Calculators. Fidelity developed the salary multipliers through multiple market simulations based on historical market data, assuming poor market conditions to support a 90% confidence level of success. These simulations take into account the volatility that a typical target date asset allocation might experience under different market conditions. Volatility of the stocks, bonds and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks (domestic and foreign) are represented by Ibbotson Associates SBBI S&P 500 Total Return Index, bonds are represented by Ibbotson Associates SBBI US Intermediate Term Government Bonds Total Return Index, and short term are represented by Ibbotson Associates SBBI 30-day US Treasury Bills Total Return Index, respectively. It is not possible to invest directly in an index. All indices include reinvestment of dividends and interest income. All calculations are purely hypothetical and a suggested salary multiplier is not a guarantee of future results; it does not reflect the return of any particular investment or take into consideration the composition of a participant’s particular account. The salary multiplier is intended only to be one source of information that may help you assess your retirement income needs. Remember, past performance is no guarantee of future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical calculations. Returns also will generally be reduced by taxes.