Many executives have great plans for acquiring wealth but no strategy for managing it once they have it. And that can be dangerous, because wealth management is a complicated and risky area where fortunes can be lost with one impetuous, wrong decision.
Dennis Barba, managing partner of the Oxford Group of Raymond James & Associates in Cleveland, knows that the financial planning process is neither precise nor does it provide any guarantees. But there are ways to reduce the risks you take with your hard-earned money.
- Use strategy, not emotion.
“We typically buy or sell because of an emotional reaction,” Barba says. “We become more aggressive when times are good because we feel we are missing out on potential large returns,” he says. “Likewise, when things are not going as well as planned, we tend to make wholesale changes based on our emotions and try and ramp up performance or avoid further potential risk.”
When people hear a mutual fund is doing well, they get excited at the thought of making money and want to jump on the “opportunity,” Barba says.
He suggests investors take the same strategic approach to investing their money that they would take to buying a car. Many people spend months researching, shopping around and weighing the risks of each potential car model, making sure they are getting the best return for their money. Applying the same logic to other investments will help ensure you’re getting the necessary earnings.
- It’s not just about returns.
There’s a lot more to ensuring long-term financial security than looking for investments or financial advisers who promise high returns.
“No money manager can guarantee you they are going to earn you a specific amount of return,” Barba says. “So when people buy performance and they are shopping around for money managers, there is no guarantee those past performance numbers are going to repeat themselves.”
There’s no guaranteed safety in diversity, either, Barba says. Allocating funds over three stocks, five mutual funds and some government bonds doesn’t mean one risky investment couldn’t tank the others.
- Know your goal.
It’s important to know your financial objective for investing, Barba says. Are you saving to pay for your children’s college in five years, to buy a retirement home in 10 years or to pay corporate taxes next year? Your objective weighs heavily on the type of investments you should make.
A longer-term goal may enable you to make more aggressive investments because you’ll have more time to recoup if you have a few bad years. However, if you’re investing to cover an expense in the near future, you’ll want to consider more conservative options that are more likely to guarantee the earnings you require to meet your goal.
And remember, there is no one-size-fits-all portfolio. What works for another family member or friend may not work for you. There are many variables to investing, including the amount of time until you retire, how steady your income stream is and your personal objectives.
- Do the math.
At Barba’s firm, associates develop models for their clients to show them what they can expect under different scenarios.
“For example, if your projected portfolio is composed of 75 percent large cap equities and you are assuming this asset class will earn 10 percent annualized for the rest of your lifetime, we can rerun these assumptions using different returns,” Barba says. “An 8 percent annualized return on this asset class may lead to the family running out of funds at age 70, thus outliving their funds.
“If you understand what can happen mathematically in good times, in normal times and in bad times, that gives them the emotional ability to understand and make better investments. The most important thing is not the return you earn or are seeking. You need to understand how much risk you are assuming. A good investor will realize this and not just focus on returns.”
An investment with large earning potential also has a higher risk potential, Barba says. If someone wants to invest conservatively and cannot accept a loss of more than a certain percentage, that portfolio may be too aggressive.
“Many people in their early working years wish to be more conservative and do not like volatility,” he says. “The thought of taking a loss is something they cannot handle. Likewise, many older individuals like and can afford risk and are happy to become more aggressive.
“Randomness favors the prepared. The more information we know about the potential incomes, the better the chances are for success.”
HOW TO REACH: The Oxford Group of Raymond James and Associates, (216) 378-0688
