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Investors are bombarded with financial advice. Personal finance publications and websites, the media, podcasts, broadcast personalities, and even well-meaning friends are prolific sources of financial wisdom. The advice runs the gamut from clever and actionable to downright dangerous, but there are certain old saws that we hear over and over again. Even experienced investors sometimes rely on maxims that are no longer relevant in today’s investment climate.
Let’s reexamine some common principles that it’s time to retire.
cash is king
While it’s always wise to have cash on hand to meet current spending needs, uninvested assets don’t generate a return.
“It pays to be fully invested, because over the long term, stocks outperform bonds and cash,” says Ilka Gregory, head of client relations at Truvvo Partners, a New York-based wealth advisory firm. York serving very high net worth individuals. individuals (UHNWI).
Determining the appropriate asset allocation based on investment objectives, risk tolerance and liquidity requirements is of paramount importance. She notes that “while some investors may have an appetite for opportunistic investing, deploying cash reserves for such investments requires market timing, which is difficult and difficult to do consistently well. The best way to maximize investment returns is to invest fully in a global portfolio diversified across multiple asset classes.”
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Debt is bad and should be avoided
Many investors have a distorted view of debt and do not realize that it is a tool that can be managed effectively. Of course, an excessive level of debt is risky and it is never advisable to have more debt than you can comfortably pay off. However, the judicious use of debt can be advantageous, particularly when interest rates are low.
With mortgage rates hovering around 3% in the current environment, taking on a modest amount of debt may be a good idea, even if you can buy a house with cash. This is a great way to free up funds for other projects, such as renovations, and avoid tying up cash in an asset. Mortgage interest also remains tax deductible in most cases, allowing you to reduce your tax liability while enjoying greater financial flexibility. The cash freed up by taking out a mortgage can also be invested in other assets that generate a return.
Alternative assets are unacceptably risky
Hedge funds, private equity and real estate are considered alternative assets, and investment is generally limited to accredited investors who must meet certain income and net worth requirements. While these investments are often complicated and may be less liquid, this does not necessarily mean they are higher risk.
A private equity investment, for example, may be subject to a lock-up period. This makes it possible for a private equity fund to take a longer-term, more strategic approach and potentially create incremental value.
Private equity investors take an active approach to portfolio investments, creating value by participating in management and governance while lending financial and operational expertise. Investors who can afford the loss of liquidity often benefit, as private equity has outperformed stock markets with a similar level of risk. Also, adding alternatives to an investment portfolio can add diversification, which reduces risk and increases return.
Invest only for income
Many investors focus on generating income from interest and dividends. This becomes particularly difficult in a low interest rate environment. In addition, investors may be limiting themselves by preferring stocks that offer higher dividends over those with higher growth potential.
Total return, including revenue and appreciation, is a more robust metric. By focusing on total return, investors can smooth and increase their income stream while increasing overall return even in the face of market fluctuations.
“The entire portfolio is the engine for generating returns, taking into account interest, dividends, distributions, and capital gains, while allowing you to optimize the portfolio regardless of performance,” says Truvvo’s Gregory,
ESG investing involves higher risk and lower return
Notions that socially responsible investing can compromise portfolio performance or involve a higher level of risk are wrong. Companies that implement environmental, social and governance (ESG) investments frequently outperform less forward-thinking companies and enjoy higher returns. as with any investmentinvestors should consider each IS G opportunity based on their individual merits and conduct appropriate due diligence.
Use multiple financial advisors to improve diversification
While allocating assets to a wide range of funds improves diversification, working with multiple advisors can create significant problems, particularly when the left hand doesn’t know what the right hand is doing. All clients, particularly UHNWIs, need unified oversight to ensure that all investment activities achieve their intended goals. Without such oversight, advisors’ lack of coordination can lead to tax problems, conflicting strategies and a failure to manage capital gains. The investor may also end up paying significantly more in fees for little or no profit.
Prevailing Wisdom Is Not Written in Stone
There are many investment principles that are immutable, such as the relationship between risk and return or the fact that diversification has been shown to reduce risk. But there are many common maxims that are not. It is worth examining prevailing investment philosophies and reconsidering how entrenched ideas no longer serve to maximize returns and meet investment objectives.
With this in mind, it might be the right time to start a conversation with your Financial Advisor and think of ways to improve your investment results.