The Tortoise, The Hare, and Your Investment Strategy: How to Choose
by Bruce Herbert, AIF® | Chief Executive, Newground
A client asked an interesting question: "Would my account grow faster if I changed from a Moderate to a Growth investment model?" She asked because her husband's IRA was invested in Growth, while her own was in Moderate.
It's a question many investors wonder about – and one that's equally relevant when considering models anywhere along the risk spectrum – whether Conservative vs Balanced, Balanced vs Moderate, or (like here) Moderate vs Growth.
While it's true that a Growth model is expected to outperform over a long time horizon, besides performance there are three other factors worth considering when you're faced with this choice:
1. Investor Psychology
One key factor is how much you, as an investor, notice or are concerned by the short- and near-term volatility of the market. Stock prices go up-and-down – sometimes dramatically – over both short and longer periods. The more you get bothered by such fluctuations, the more you might prefer a Moderate model (or even one that's more conservative). This is because (compared to a Growth model) the more steady Moderate model will generally have less dramatic swings – which can mean greater peace of mind and better sleep at night.
2. Time Horizon
Another critical consideration is your time horizon – i.e., how much time is there between now and when the money will (or might) be needed? The more time you have, the better able you generally are to weather the storm and wait out short-term market swings. With a longer time horizon, the higher potential returns of a Growth model may be more appealing, since there's time to ride out volatility (which inevitably will come and go).
3. Sequence of Return Risk
A concept related to time horizon is "sequence of return risk." This refers to the order or sequence in which good years and bad years occur during a given investment period. Simply put, the same number of up- vs down-years will result in a very different outcome overall if the down-years happen early on in the investment period. If an investor is young or won't need the money for a long time, there's more opportunity to make up for early losses (if they happen). However, if the money is likely to be needed soon, a string of early losses can be much more damaging.
This is why, for example, a more moderate allocation is often preferred as an investor nears retirement – because it can reduce the risk of suffering a major setback just before or as the money is needed.
Making a Choice
Ultimately, a choice between investment models will be highly dependent on your specific situation. Factors like risk tolerance and market experience, investment goals, and overall wealth and future prospects will all play a role. Though not always an easy decision, weighing the trade-offs between risk and return with your advisor can help identiry an approach that's right for you.
If you're wrestling with these kinds of decisions, or just want a second optinion, please reach out. We're here as expert guides to help clients weigh options and make choices that align with their unique needs and objectives.
Together, we can help reach your most important financial goals.
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Note: This material is intended for educational purposes only. As with all our public writing, blog posts do not constitute tax, financial planning, or investment advice. Likewise, they are neither an offer to sell nor a solicitation to buy any investment or security.
