Many families have discovered that the assets they intended to use for important purposes — paying for the children’s college educations, funding retirement, buying a long-awaited vacation home — have been swallowed up by the financial crisis. They’re now having to make last-minute and often drastic adjustments to their plans.
It’s impossible to anticipate just what the markets will do in the future, but you can try to limit their negative impact on your bottom line.
Investment strategies are not all the same. You can expect more growth from some strategies than others, but that growth is likely to be uneven, with big swings along the way. A supposedly high-return investment is not much use if you need to sell it to raise cash during one of its downswings, when it has fallen to levels well below its long-run trend. For important goals with reasonably predictable timing like college expenses, you might be better off investing conservatively to increase the likelihood that the money will be there when you need it.
Of course, conservative strategies tend to have lower returns, requiring you to invest more money initially to fund them. You need a lot of income and a lot of savings if all your investment strategies are conservative. However, if your goal is far enough in the future — for instance, retirement for someone in his or her 30s or 40s — you could tolerate the swings in value of more volatile investments to increase the probability of greater long-term growth. The key is to match your investment strategy to your time frame and goal.
You should start by defining your three or four most important family financial goals and creating a dedicated “financial bucket” for each investment. Different time horizons, and different implications of not achieving the particular goal, would dictate markedly different investment strategies for the various buckets. The more time you have, the more ups and downs you can weather on the path to a better overall return. The nearer and more vital the goal, the less you should gamble. For example, strategies dominated by equities have earned more historically than strategies loaded with bonds. So, keep most of the equities in the buckets for long-term goals, and use bonds, CDs and other reliable instruments for near-term and important goals.
Using long-term historical returns for these assets, you can work backwards to the savings rate you will need to reach your goals. If the savings rate seems unrealistic, then you will need to revise your goals and accept the implications of the revisions. But you will have the knowledge that you are making the most of the opportunities available, tailored to your own situation and needs.
George Feiger is chief executive officer of Contango Capital Advisors, Inc., the wealth management arm of Zions Bancorporation. The opinions expressed in this article are his and not necessarily those of Contango or Zions. Contango (www.contangoadvisors.com) focuses on individuals’ real-life goals and uses sophisticated analytical techniques and risk-management tools to design clients’ investment portfolios. In Utah and Idaho, Contango operates under the name Zions Investment Services Group. E-mail Contango at contact@contangoadvisors.com.
Please note: Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser and a nonbank subsidiary of Zions Bancorporation, are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates and MAY be subject to investment risks, including the possible loss of principal value of amount invested.
Featured in the July/August 2009 issue of Zions Bank’s Community magazine.
