Focus on What You Can Control
Katie Martin, CFA, CFP®
February 10, 2021
As someone who is pretty Type A, this last year has been a harsh lesson in just how little control I have over most things in my life – and I’m guessing I’m not the only one who feels this way. While it was certainly challenging and uncomfortable, it was also a great reminder of how important it is to let go of the things that I truly cannot control, and instead, focus my energy on what is actually within my power to change.
While that’s a valuable life lesson, it is also incredibly important when it comes to investing. We can’t control if the market goes up or down, and we have no power over how other investors behave. Unfortunately, this is often what we hear the most about in the news. It can elicit an emotional response in us that makes us feel like we should be taking some sort of action, but acting on emotion doesn’t typically lead to good investment decisions. To tune out the noise, I work with my clients to keep our focus on those things within our control to build a portfolio designed to help them reach their long-term goals:
- Align your portfolio to your ability and willingness to tolerate risk – One of the key contributors to how much your portfolio goes up and down is how it is allocated between equity and fixed income investments. The more equity in your portfolio, the greater the potential for higher returns over time, but also for wider swings in performance.How we allocate our portfolio is a function of our risk tolerance. If we have a long time horizon, we generally have the ability to take a bit more risk since we’ll have time to recover from any potential losses. However, we also must keep in mind our comfort with taking risk. If we are taking more risk than we can handle, it might cause us to make a reactive, emotional decision based on performance. While we can’t control how our portfolio ultimately performs, focusing on making sure we’re in the proper asset allocation can help us stay invested throughout the inevitable ups and downs in the market.
- Diversification – No one has a crystal ball to tell you whether US stocks are going to perform better than international stocks, whether large companies are going to outperform small, or whether bonds will beat equities this year. Since I can’t predict it, and I certainly can’t control it, I prefer to own some of all of them. Being properly diversified means that you’re likely going to always be apologizing for some investment in your portfolio since they shouldn’t all be performing well at the same time.
- Use low-cost investments – Exchange-traded funds (ETFs) and mutual funds are a great way to achieve diversification within a portfolio since they tend to hold a number of different securities in a single investment. However, investors pay a cost (called the expense ratio) for the management of these funds. The higher the expense ratio, the more it eats into the returns of the investment. Therefore, I prefer to use low-cost, diversified ETFs, where possible, to reduce the impact that expenses have on the returns for my clients.
2020 was such an eye-opener when it comes to what’s truly within my power – turns out how much toilet paper we own isn’t actually one of those things. However, when it comes to investing, making sure we make good decisions on those things within our control can help us stay on track to achieving our long-term goals.
This information is for general education purposes only and should not be construed as personalized investment advice. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. To determine which investment(s) may be appropriate for you, please consult your financial advisor prior to investing.