Be Intentional with your Investments

Being intentional with your investments is critical. Intentional wealth building begins with you, my friend. Here’s what helped me, and I hope they will serve you well on your journey as well.

Intentional Investing (A Matter of Preference)

With investing, much like every area of life, there is a lot of personal preference that can saturate the community. Zoom-out. Try to take a moment and understand what you are after, what you need, what you have access to. Being intentional with your investments is about doing what is right for you and your family. My friend, before investing, take the time to do your research and define your investment objectives. Then, when an opportunity presents itself you’ll make well-informed decisions.

Sleep on it! Be Intentional with Your Investments and Don’t Rush

Risk is one thing on paper, it is another on the monthly statement. An investment boasting strong historical returns is a magnet. Be careful! Past performance is not a guarantee of future results. Remember, the high return might well be accompanied by periods with higher losses. When going through those losses with YOUR money, it may prove to be much less palatable.

Keep that in mind when planning, and ask yourself what amount of loss you could encounter and still sleep well at night. Is it 10%? Perhaps 25% or even 30%? Take time, and define this at the beginning, before investing. Know yourself, and adopt the strategy that you have researched, documented, and reviewed with a trusted financial advisor. Don’t be a hostage of flashy marketing. What looks good on paper may end up creating lots of frustration!

“Know Thyself” and Anchor your Expectations in Reality

If you’re investing for recreational purposes, I recommend setting aside a set amount and then limiting it to that. As the old saying goes, “know thyself” and be careful about chasing the market if you’re prone to impulsive spending.

I encourage people to take the approach of a student and make sure they’re learning through the down-turns. Follow your investment strategy and rules (e.g. lock-in gains at X%, cut losses at -X%), and adjust afterward. Soon, you’ll have a fun hobby that (hopefully) makes a little return as well.

Understand your risk profile, and stick with it. If you have a stomach for risk then proceed accordingly. However, what is right for someone else is not necessarily right for you. If you desire a more conservative portfolio overall, then set realistic goals for investment returns. Said another way, pick your tolerance for losses balanced by understanding forgone opportunities for higher returns.

Intentional Wealth from Weathering the Storms

Building on or prior thought, don’t chase the markets and don’t invest emotionally. Define investment rules for yourself based on your risk preferences and goals. As an exercise for you and your spouse, take time to reflect on your investment objectives and rules. Are both of you committed? Do you both agree on the objective? Taking the time to get on the same page is very important. This jointly reinforces good investment discipline. Then, when the various scenarios present themselves you’ll have a plan to act upon.

Strategic Asset Allocation (Goals & Rules for Your Investment Strategy)

In general, I believe each investment, regardless of “fun” or retirement, should have a goal. If you are investing for fun, just to learn, and experiment, then that should be part of the goal. As an example, I have a small brokerage account that I use for testing ideas and speculating in the market. I could lose every penny in that account and not lose a wink of sleep. In that example, the account’s goal is clear; I can invest accordingly. In contrast, my retirement accounts are strictly reserved for retirement. Compared to the “fun” investing, I go through much greater lengths to carefully research and manage those instruments.

Now, with your investment strategy documented and your goals established, take time to consider the allocations of your assets. Tactical asset allocation will help you prepare for the unexpected and accomplish your goals. Broadly speaking, try to diversify your portfolio, and make sure you are not over-exposed to any one investment or asset. Additionally, make sure you have an emergency fund in place. Avoid selling your assets in response to an emergency.

Time Horizon (Long-Term vs. Short-Term)

Next, think about the horizon of your investing period. Long-term and Short-term definitions help you identify and pursue certain investments to match those needs.

For example, 401(k) plans might offer a one-stop-shop solution in a target-date retirement fund. These are set up to shift to a progressively more conservative portfolio as the date of the retirement approaches. However, they can also be more expensive. For some people, the convenience of having the portfolio shift to a more conservative allocation over time (a more passive approach to investing) is with the increased fee structure. Still, others might prefer to invest in a diverse basket of various funds and ETFs to solve for a similar retirement objective.

The same is true for short-term objectives. Pre-bundled options are frequently available to help with your investment objectives. Just remember: those types of options, (especially if actively managed) may cost more than the DIY counterparts. Many times there is more than one solution to a problem.

Active vs. Passive Management

Another important pillar in your investment strategy should be the approach you prefer to take regarding management. Actively managed funds will generally include higher fees; passive management is generally the opposite. An actively managed fund might be a good fit you prefer a manager (e.g. fund manager) to monitor and manage the investment. Passively managed funds might include things like ETFs and some low-cost mutual funds. Passive management could be seen as the “set it and forget it” approach to investing. Regardless of the semantics, the important element is the degree of passive or active management you desire.

There is also the opportunity to take a hybrid approach by selecting a few different investments, ETFs, Mutual Funds, etc., and then following those selections for several years (any set amount of time). You could then periodically check in to rebalance the portfolio, and leave the selection of the funds to once every 5 years (for example). This might help cut down on higher fees from actively managed funds.

Reinvesting Dividends

It is also worth noting that some online brokerages offer direct reinvestment of dividends. By directly reinvesting your dividends, the dividend itself is then used to purchase additional increments of shares. If you have this option available, check it out and see what the fees are (if any) before getting started. Regardless of whether or not you prefer active or passive management, if dividend reinvestment is available for a low fee (or even free), this might be a great way for you to grow your position for the long term.

Hedging your Portfolio

We talked about risk earlier, so let’s continue where we left off. Being intentional with your investments includes hedging against risk when possible. This means some of your investment selections should be made because of the relationship with other assets and the augmentation they provide to the overall portfolio structure. For example, negatively correlated funds can balance exposure in certain sectors, and Bitcoin and Real Estate could be good hedges against inflation. Additionally, in a general example, within your Roth IRA, you can use TIPS (Treasury Inflation-Protected Securities) and regular, on the run Treasuries to provide some hedging against inflation in your portfolio.

You could also consider options, puts, and calls depending on your exposure. I would recommend only using these if you’re quite comfortable with what you’re doing. Derivatives can be very helpful to a portfolio, but in the wrong hands (or those without experience), they can be dangerous.

Exotic Investments

Unless you are a high-speed, low-drag investor with experience, I would recommend avoiding exotic investments (at least at first). Derivatives, alternative assets, private equity, joint ventures, etc., are all examples of ways one can make money. However, like any investment, make sure you understand what you are getting into, have an appetite for that risk profile, and are financially capable of entering that arena. I highly recommend consulting with your trusted financial advisor before getting into exotic investment opportunities.

Investment Administration

It is very important to take the time to manage the administration of your portfolio. For example, to the extent possible, understand what you are truly investing in at the onset of your transaction. For example, try to avoid any surprises when you need the money such as being unable to exit your position due to trading restrictions.

At the end of the day, make sure you have a handle on what you signed up for. This is true for investing on small and large-scale levels. As an example, you should have a plan for your 401(k), for your Roth IRA, and for your online brokerage, etc. It is important to be intentional with your investment administration on an individual level, and on a holistic portfolio approach.

Fee Schedule (Fees and Hidden Costs add up!)

Be intentional with your investments by reviewing and managing the extra costs! Fees and additional hidden costs can make or break an investment selection. Be very careful. Before you transact on a particular investment, make sure you know what you are going to be charged. Ensure you know what you are going to be charged (before you transact on a particular investment). One way to by reviewing a schedule of the fees. Various investments may have different names, but the information should be available. You can save time and money with a little effort up-front, prior to investing, by taking note of the fees.

Fees can come in all forms. One way to identify these is in the prospectus. Most will agree, a fund’s prospectus is a bit of a dry read. However, even a quick scan can help you make a more informed decision on fees, holding periods, management objectives, and the like. I highly recommend doing your research before taking the plunge.

Another way is to review the expense ratios. Generally speaking, lower is better. A flashy fund that has a higher historical return “on paper” may actually be underperforming when compared to a low-cost ETF. (Especially when you factor in your fees and costs). Also, remember, past performance is no guarantee of the future. At the end of the day, make sure you account for the impact of the higher fee structure if you decide to buy a fund or investment that is relatively more expensive.

Opportunity Cost

The other cost to think about is the opportunity cost. Being Intentional with your investments means weighing the opportunity cost of your selection. The choice to invest in one place is also the choice not to invest in other funds, thereby paying an opportunity cost to participate in those returns (and losses). Keep this in mind when weighing your options on an individual and portfolio level, and chose the option that best compliments your overall portfolio position.

Be Intentional with your Investments: Liquidity and Access

Be intentional with your investment selection by carefully reviewing liquidity and access to your funds after the trade has been executed. As we discussed previously, a flashy fund might also be thinly traded, and it may have all sorts of restrictions on withdrawals. Given those considerations, the fund might not be that attractive after all. Make sure you know what you’re signing up for! Make sure this fits with your investment plan and time horizon. Longer-term investments can be more illiquid. By comparison, investments designated as short-term should be more liquid.

A lot of information is available in a prospectus, our favorite dry read mentioned previously. For example, it should detail what holding period requirements there are in one form or another. As an example, a fund might stipulate that investments are required to be held for 90 days (as an example) or longer. In addition, there may also be an additional trading fee associated with trading before that deadline.

Beyond holding period restrictions, you can also track down the bid-ask spread as another point of reference to determine the liquidity. Wider spreads generally indicate a thinner market which could suggest difficulty in exiting the position. Also, be careful when trading “trendy” funds as they may attract a lot of upfront investment, but be difficult to exit if a “flash crash” later occurs.

Portfolio Turnover, Taxes, and Withdrawals

As you move down the list, being intentional with your investments includes making sure you understand what Uncle Sam is collecting for your hard work. Internalize the differences between taxes on short and long-term gains, and factor that into your strategy for investing. In general, and depending on your taxable income, long-term capital gains receive more favorable tax treatment compared to short-term capital gains.

Carefully consider putting your investment accounts within an IRA (or other tax-advantaged instruments) to further manage your tax implications. In addition, as it relates to retirement accounts, be careful when withdrawing funds prematurely. I recommend carefully differentiating between casual investing via an online brokerage and what you plan on using for retirement. While not a bad thing, turnover on your mutual fund could result in more taxes.

Final Thoughts – Being Intentional with Your Investments

In all cases, it is important to note that these funds aren’t intrinsically “bad” or “evil” per se. Just be sure to understand what you are buying and how the administration will impact your bank account (in the short and long term).

Regardless of where you find yourself on your personal finance journey, the key is to keep growing, keep building, keep cultivating Mêtis in your Money Matters. You’re taking charge of your present and shaping your future and the future of your loved ones. Keep up the hard work!