May 4, 2020
At Ronald Blue Trust, we offer strategies and concepts to help our clients navigate through all of life’s journeys, including periods of economic disruption. We will be releasing a series of blog articles discussing these topics in the coming weeks; the first one is about time-based investing. In our experience, time-based investing is an important strategy that has given our clients financial clarity and confidence through past crises, as well as the current pandemic. Here’s how it works.
Has it ever been more obvious that our world is inherently uncertain? At times, we can be lulled into a sense of complacency by the order and predictability of life. Our routines and schedules give us so much we can count on. Or so we think.
The coronavirus (COVID-19) outbreak has provided a jolt back to the stark reality that the normalcy of life can be abruptly and dramatically disrupted. For some investors, this has been a painful reminder that markets fluctuate — sometimes wildly — and asset returns are uneven and unpredictable, especially in the short run. What should market participants do?
Preparation and Planning
At Ronald Blue Trust, our approach is built around preparation and planning rather than predicting or reacting. While not attempting to predict the future, we continually analyze the markets and work to prepare for what may lie ahead. When it comes to thinking about the periodic recessions that inevitably come, we don’t attempt to move into and out of markets to avoid declines in asset prices. Even the most seasoned investors are notoriously unskilled at timing market exit and reentry successfully.
More than any other component of the investment process, we believe that developing a goals-based financial plan and sticking with it has the greatest impact on long-term investment success. Increasing the probability of meeting your various financial goals is how we define investment success. When you work with your financial advisor to develop a detailed, goals-based financial plan, your investment strategy is tailored to your future cash flow obligations, risk tolerance, and respective time horizons.
Let’s explore what a goals-based financial plan looks like.
Goals and Time Frames
At Ronald Blue Trust, we recommend that investors build a financial plan that heavily leans on time frames in establishing their various financial goals. We believe in a “bucketing” of portfolio investments in line with the time frames associated with those goals. For example, we believe investors should set aside the amount of liquid funds needed to meet the next one to two years of cash flow requirements in a Short-Term bucket. Those funds could be invested in money market funds or short-term bonds. For more intermediate-term cash flow needs in three to nine years, we utilize an Intermediate-Term bucket. Typically, investments made in this portion of the portfolio would be directed toward bonds with intermediate-term maturities. Finally, more long-term goals — 10 or more years — would be addressed by a Long-Term or an Ultra-Long-Term bucket that would utilize growth assets (like stocks). This approach is illustrated below.
Helping clients align short- and intermediate-term cash flow needs with more stable and liquid investments prepares them for times like we’ve seen recently when long-term growth assets experience severe declines. If a downturn occurs, we remain invested in growth-oriented assets so that our clients don’t miss out on the recovery that inevitably follows. History suggests those downdrafts pass, recovery follows, and long-term investments left in place can participate in that rebound. For our clients’ short- and intermediate-term cash flow goals, we utilize more stable asset classes (like bonds) that have demonstrated the ability to withstand stock market declines.
How Our Approach Has Worked
How has preparation and planning benefited Ronald Blue Trust clients? In 2019, our clients were encouraged to look past the building uncertainty around economic growth due to the trade war with China. Also, while admitting that a recession would certainly arrive one day, the impulse was resisted to pull back from long-term growth assets. Consequently, our clients were rewarded with robust global equity market returns in their portfolios as financial markets provided some of the best returns of the past decade for both stocks and bonds.
While some of those returns have been given back in the stock market declines we’ve experienced so far in 2020, investments in the short-term and intermediate-term portions of client portfolios are holding up reasonably well. In fact, the bucketing by time frame in our investing process is helping give our clients confidence that they can ride out this storm. It’s allowing them to be patient for an eventual recovery and rebound in the asset prices in their long-term bucket.
The Peace of Mind to Persevere
So, what might all of this mean for you and your investments and, more importantly, your own personal financial plan? As stated before, we believe above all else, developing and sticking with a goals-based financial plan has the single greatest impact on long-term investment success. In addition, we believe the best approach to building that plan is to consider time frames for your various financial goals. In working with our clients over many years, we have observed that during very uncertain times, investors can be motivated by fear and greed. However, allowing either of these emotions to drive decision-making is typically counter-productive to a long-term investment strategy. Successful investing is a marathon rather than a sprint, and it’s vital to have a game plan. A personalized financial plan customized to your specific time frame-informed goals can help provide the confidence to calmly face a future that can feel uncertain at times.
If you would like to learn more about developing a financial plan based on your goals and about time-based investing, please contact a Ronald Blue Trust advisor by calling 800.987.2987 or emailing [email protected].