Astute fly fishermen and women match their fly to the insect to catch more fish and this is referred to as “match the hatch.” For example, if you’re fishing in area with grasshoppers, you want a fly that looks like a grasshopper. Entomology is the study of insects so a basic understanding of it will help fly fishermen and women have a better experience when they’re on the water.
Investors should try to match their hatch as well. An investor who wants to improve their odds for investment success should match their hopes, dreams and fears to their investment portfolio.
Completing a financial plan is one way to increase your odds of financial success. Your plan will assist you in identifying and quantifying your financial goals. The discovery period for your financial plan is just as important as the finished product. The more detailed and specific your goals and financial information, the better your financial plan will be. Of course, your plan will only be as good as the data you put into it so spend some time in complying your information.
Knowing your risk tolerance is another important factor for your investment success. However, trying to understand how much risk you’re willing to take is challenging. During a rising market investors are willing to take on a high degree of risk. When markets fall, investors are risk averse and aren’t comfortable owning risk assets. How much risk can you handle? One benchmark is to review your trading habits during the Great Recession of 2008. During the 2008 market meltdown, did you hold on to your investments or did you sell your holdings? If you didn’t sell your investments, you’re probably a growth oriented investor willing to withstand a high level of risk. If you sold your investments, you’re probably a conservative investor. In addition to your actions, you can also complete a risk tolerance questionnaire or two. Riskalyze and FinaMetrica are two services that can help you identify your risk tolerance level.
Once you’ve identified your financial goals and risk tolerance, the next step is to make sure your investments are aligned with these metrics. If your investments are united with your financial goals and risk level, then you’re more likely to stay invested through multiple market cycles.
What should you do if your financial plan, risk tolerance and investments are out of whack? If your plan isn’t in sync, then changes must be made. Your investment portfolio will need to be rebalanced and aligned to your financial plan and investment goals. The portfolio adjustment might be a minor tweak or a major overhaul. If your plan calls for a major overhaul, pay attention to taxes, fees or penalties before you make any changes.
Catching a fish with the right fly is a thrilling experience. However, if you’re fishing with the wrong fly, you need to change it as soon as possible to the correct fly so you can catch more fish.
There is no greater fan of fly fishing than the worm. ~ Patrick F. McManus
Bill Parrott is the President and CEO of Parrott Wealth Management. For more information on financial planning and investment management, please visit www.parrottwealth.
October 13, 2017