Investment strategy: Aligning investments with long-term goals

Making strategic adjustments to your investment portfolio is crucial for achieving long-term financial goals. Whether you’re planning for retirement, saving for your children’s education, or building wealth for future generations, aligning your investments with your objectives is essential. This article explores key aspects of investment strategy adjustments, including identifying personal financial goals, allocating assets effectively, and managing risk and volatility. By understanding these elements and working with financial professionals, you can create a robust investment plan tailored to your unique needs and life circumstances.

Identify personal financial goals

The first step in adjusting your investment strategy is identifying your personal financial goals. These goals are likely to vary significantly depending on your life stage and circumstances. For instance, someone nearing retirement might aim to retire comfortably within five years, while a younger individual with a family might seek guidance on saving for education or family travel. If you’re unsure about your goals, a financial planner can help you outline your objectives, which can then drive your investment decisions.

Review asset allocation

To ensure that your investments align with your long-term goals, you will need to review your asset allocation periodically. Asset classes range from low-risk investments like treasury bonds to highly speculative ventures, such as small business stock and direct investment in startup companies. Your risk tolerance and time horizon will help determine the types and ratios of your invested assets.

Manage risk and volatility

No investment instrument is 100% risk-free, but understanding these risks can help you preserve and grow your portfolio. One of the biggest mistakes investors can make is selling their investments when the market is down, which can negate gains, lock in realized losses, and reduce long-term growth. Establishing a liquidity reserve of less-volatile fixed-income holdings to cover projected cash needs over the next one to two years can reduce the likelihood of being forced to sell investments at an inopportune time. Diversification will also minimize risk. While it might be tempting to go all in on stocks for high-return, long-term growth, a balanced portfolio with a mix of bonds and other asset classes can provide competitive returns and reduce expected risk.

Adjust investments based on objectives

Your investment strategy should be tailored to your specific objectives. If you’re saving for retirement, your approach will probably differ from saving for your grandchildren’s education. A grandparent might have low-risk investments suitable for their age, but if the funds are intended for grandchildren who won’t need the money for decades, a shift toward more growth-oriented investments might be appropriate. Similarly, if you’re saving for a child’s education, the strategy should evolve as the child gets closer to college age, moving from riskier assets to more stable ones.

Consider time horizon and cash flow

You will need to consider your time horizon, needs, and available resources when adjusting your investment allocations. Saving for goals that are far in the future may necessitate a different approach than saving for a near-term goal. For example, you can take more stock market risk if you are saving for retirement in 30 years; you may need a less volatile portfolio that emphasizes short-term, high-quality bonds and money funds if you are saving for a house purchase in two years. Individual circumstances can also complicate this. For example, if you plan to sell a business in three years, your strategy might need to be more nuanced. Working with an investment professional and financial planner can help you navigate these complexities.

Risk tolerance, volatility, and capital preservation—sometimes competing interests

Risk tolerance is a critical factor in your investment strategy, referring to the level of volatility and loss you are willing to accept and the acceptable level of variance from that objective. When working with individual portfolios, this can sometimes conflict with practical needs and objectives. Consider someone with limited funds who expresses a high appetite for risk and wants to invest aggressively to fund living expenses yet would face significant hardship should their portfolio’s principal value diminish. In this case, there is a disconnect between the investor’s perceived risk tolerance and the level of risk they can afford to take on. Balancing these competing interests—the key role of an experienced portfolio manager—is essential for portfolio growth and longevity.

Tax considerations in investment planning

Tax implications are another aspect to consider when adjusting your investment strategy. Retirement assets like IRAs and 401(k)s have unique tax considerations, as do gifts of appreciated stock. However, taxes are inevitable—it’s not a matter of if they’re paid so much as when and by whom they’re paid. Tax considerations also impact your withdrawal plans and investment strategy.

Optimize your investment strategy

Investment strategy adjustments are vital for aligning your investments with your long-term goals. By identifying your objectives, understanding risk and volatility, and adjusting investments based on your goals and needs, you can optimize your investment plan. The investment professionals, financial planners, and tax professionals at Nixon Peabody Trust Company can provide valuable guidance in navigating these complex decisions, giving you confidence that your investments are well-positioned to achieve your financial goals.

Benjamin Kuehn
Trust Advisor
+1 617.345.6038
bkuehn@nixonpeabody.com