Columnists John Grace Opinion

ON THE MONEY: Five critical elements for investors to consider

With world growth issues on stage front and center, when it comes to investing there are five critical elements for investors of all sizes to keep top of mind.

First, what do you want your money to do? Before you put your chips on the table determine how much money you need to make work optional if you are working.

For those already retired, you need to focus on how much money you need and what withdrawal rate serves to keep work optional. When workers can see they are either on track to amass the retirement funds needed to make work optional and retirees can see that they can maintain their life style in retirement they can rest easy, instead of stress out when the market goes haywire.

Second, while costs are important to pay attention to, do not make priority number one to pay the lowest costs you can. Sometimes you have to pay more to get more.

If, for example, you paid the lowest costs, but your portfolio in 2008 was off 40 percent when the market was off 37 percent, the low-cost option didn’t help one bit. 

If, on the other hand, your fees were twice as much in a different arrangement, but your losses were 20 percent or less in the same year, you ended the year better off in two significant ways. Your loss was less, which makes for the conditions for your balance to rebound faster.  This could look like two years instead of four years for your account to get back to even.

Third, determine in advance how much loss you can withstand. A 50 percent loss for example when you are not taking income can become a vastly different experience when you need to take money out of your account.

Pay particular attention to traditional retirement accounts, where the IRS requires annual withdrawals that cannot be stopped and will increase as a ratio of your account balance every year for the rest of your life. 

Since this is uncharted territory for many Americans, savvy investors employ technology so that they can see in advance how bad the loss might be before they go nuts. With the personalized win/loss parameters set in advance, investors can set reasonable portfolio expectations that need to be reviewed regularly.

Investors who discover they can withstand an 8 percent loss come to know that they are not willing to wake up to a loss of 40 percent or more again.

Fourth, discover how you can diversify unlike you have ever diversified your portfolio before. It’s not uncommon for investors to own mutual funds and exchange traded funds, where they are left to believe they are “diversified.”

But when you take a closer look at the portfolio, regardless of goals, it is often the case that there are two assets classes that includes stocks and bonds. Unlike retail investors, foundations and endowments, however, have changed their allocations over the past 20 years.

In fact, it is not uncommon for institutional accounts to own six assets classes or more. The more complicated approach has shown to be helpful in smoothing out turbulence which cannot be seen in advance.

Finally, for those who want more portfolio consistency, look for companies that have track records demonstrating active management. Seek the evidence that shows for example accounts beginning 2008 with investors holding 5 percent cash, but finished the year with 60 percent in cash or more by yearend.

Identify risk off/wax off strategies in 2008 moving assets off of the train tracks, followed by risk on/wax on in 2009 which moved from the safety of cash or alternatives back into risk assets as market volatility changed from negative to positive when the coast was clear.

Addressing these five crucial issues now can help investors prepare for the good, the bad, and the unforeseen in 2019.

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.