This article is part of a paid partnership between TD Wealth and HerMoney Media
Digital tools and automation have made it so much easier to invest, but when our portfolios are left unchecked, you run the risk of potentially making some costly mistakes. But what does it really mean to be an active participant? And how can you get it all done when 24-hours in a day just never feels like enough? Here’s some good news: It doesn’t require a heavy lift.
WHAT DOES IT MEAN TO BE AN ACTIVE INVESTOR?
Whether you’ve just started investing or been at it for years, you’ve probably been told you need to have your head in the game, even if you have a financial advisor. Especially if you don’t. Why? Because ultimately nobody should care more about their finances than you. But that’s not the only reason. Without your eyes on the prize, you’ll never know when you may veer off course.
Thankfully, being an active investor doesn’t mean checking your portfolio daily, or changing investments based on the news du jour. Rather, it means understanding where you are now and where you’re headed in your financial journey. “Staying active in investing means identifying your goals, identifying your risk tolerance, and identifying how much time you have,” says Alyson Klug, Head of U.S. Wealth National Sales at TD Bank. When things in your life change, you’ll be ready to act.
Your level of participation in your investments isn’t static, either. It changes as you move along your financial journey, from your first job to your final one. In the beginning, you may be mostly focused on maximizing your 401(k) contributions. And your life goals change, your interest and participation in your portfolio will change.
“Key life moments and key milestones in people’s lives will require more active financial management,” says Kenneth Thompson, Head of U.S. Wealth Shared Services, TD Bank. “Managing a portfolio isn’t the most important thing to achieving financial success. It’s the things around the management of the portfolio that are the determinants of success.”
WHY DOES IT MATTER?
It’s clear that your needs and finances will change over time, but why not just “set it and forget it?” Isn’t that the best way to stay the course when things go south? Well, yes and no.
Having a long-term investment plan, considering what you are saving for and how long you must do it, is the best path to achieve financial success. But if that path is too rigid, it can throw you off course. “If you set it and forget it, you may achieve a goal you set in the past vs. something that is more important to you now,” says Klug. “You need to have some review to make sure investments are still working toward your goals as your goals change.” In other words, to achieve your ever-evolving goals, your risk tolerance, timelines and potentially even your portfolio may require adjusting, more risk or sometimes less risk. If you are not an active participant with your portfolio, you won’t know when it may not be aligned to your current goals or an investment opportunity may present itself. It’s also important to understand how one financial goal relates to another. “Your goals are interchangeable, fungible, and are prioritized in specific ways. You need to protect certain goals while other ones can change,” says Thompson.
HERE’S HOW TO DO IT
Thankfully, playing an active role doesn’t necessarily require a master’s in finance. In many cases, it might simply come down to understanding a few key investment terms — asset allocation, rebalancing, and savings rate — which could have a direct impact on your everyday life.
Take asset allocation for starters. This is how the investment portfolio is constructed, what is the balance between stocks, bonds and cash. When done right, it balances your risk tolerance with the potential rewards while taking into consideration how long you might need to invest and the balance between growth and income-generating investments.
Rebalancing is a process that realigns your portfolio weightings to maintain your desired asset allocation. When the financial markets change and your asset allocation drifts, your portfolio can drift over or under weighting in a specific area and it can alter the amount of risk in your portfolio. Rebalancing your portfolio may be automated or may require your financial advisor to get involved.
Your goals and priorities may also change over time, requiring you to reconsider your timelines, risk tolerance and potentially the construct of your portfolio to obtain new objectives. “With this all-in mind, you’re asking yourself: Am I on track or off track?” explains Klug. Changing your portfolio isn’t something you need to do often — an annual or semi-annual check-in with your financial advisor could be enough.
Lastly, there’s your savings rate, which will change depending on your life stage and competing demands. Available income that you have after you pay all your bills and allocate a portion to discretionary spending may be set aside for investments and savings.
HELP NAVIGATING PORTFOLIO PITFALLS
Being an active participant never (ever!) means you should try to time the market or react emotionally when stocks are rising or falling… Going in and out of the market is not conducive to achieving long-term financial success. (And worse, it could set you up for losses.) It’s also where financial advisors can really help guide you on the best path for your goals and risk tolerance. They are there to remind you your portfolio is designed to best meet your goals and objectives vs. getting caught up with the latest meme stock or cryptocurrency. “It’s about investing versus trading and keeping emotions in check,” says Klug. “This is one place where an advisor can help.”