Your investments should support what you want to do: retire, fund care, help family, or keep money available for a change of plans. We begin with those needs and build a low-cost, diversified portfolio around them.
Our professional worrying has a practical purpose here. We consider how personal circumstances and market changes could affect the plan, then decide with you how much risk to take.
Start with broad, low-cost indexing
Most of the portfolio begins with broad-market index funds. Decades of evidence have made us skeptical that an investor can reliably identify, in advance, the active managers who will outperform after fees. Index funds provide broad market exposure at relatively low cost.
Use the research, but keep the claims modest
Research on long-term returns informs our use of value and smaller-company investments. Value investments emphasize companies priced low relative to measures such as earnings or assets. Smaller-company investments focus on businesses with lower stock-market values. We may tilt a portfolio toward those risks when the evidence and the client's circumstances support doing so. A tilt means holding more of a category than its share of the broad market. Either category can underperform for long periods.
Understand what a market decline would mean for you
We ask when you will need the money and how a market decline would affect you. A sequence of weak returns early in retirement can be especially difficult when withdrawals are reducing the portfolio at the same time.
Suppose one portfolio supports higher expected spending but creates a significant chance of needing to sell the house, return to work, or make a permanent spending cut. A less aggressive portfolio may be the better choice. The extra expected return is not worth the risk when the bad outcome crosses a boundary the client cannot accept.
Compare the tradeoffs
A portfolio with more stocks may offer more growth over time, but a decline can be harder to manage when you are withdrawing money. Holding more in bonds or cash may reduce exposure to stock-market swings, while leaving other risks, including inflation and lower growth. The mix needs to fit when you will use the money and how much flexibility you have.
We compare those tradeoffs against your income needs, reserves, and ability to adjust spending. No allocation guarantees a minimum income or protects against every loss.
We use current valuations to inform our assumptions about future returns. The price paid for an investment matters, even though it tells us little about what the market will do next month or next year.
What the portfolio is for
The right investment approach depends on what your money needs to do. As part of ongoing planning, we revisit that purpose with you when your circumstances or priorities change. Read how working with Pathfinder begins.