Are you an investor who follows the daily or weekly ebb and flow of your retirement accounts? If so, market downturns might be a bit unsettling at times. But what if instead of focusing on today’s bottom line you focused instead on outcomes—your progress toward your goals? Here’s how.
Outcomes-based portfolio evaluation can give investors confidence during market swings
The focus is on a range of outcomes at key progress points
It’s easy to get worried about bottom-line portfolio balances during market downturns.
Keep in mind, though, that market downturns are often short-lived, while savings goals are longer term. When looking at your portfolio during volatile markets, rather than simply focusing on the sum total, there’s another way to evaluate your portfolio: by considering long-term outcomes.
An outcomes-based portfolio is constructed to help you achieve a particular goal, such as saving for college or retirement. It includes a list of progress points along the way. This type of portfolio evaluation focuses on the reason to save money and describes the amount you should have accumulated at any given point in time, rather than just focusing on the best possible return.
When a portfolio is constructed to focus on the outcomes, the trade-offs of risk, return, and volatility are factored in. It’s another reminder that money is a means to an end.
Of course, we all want the best possible return for our money. But if your portfolio evaluation starts and stops with percentage returns—rather than steady progress toward a goal—you may end up taking more risk than necessary. Investors who are saving for a particular goal may not need excess returns and thus won’t need to take on excess risk.
When market swoons happen, too much focus on the size of the return—or the loss—can lead to emotions that may override your plans. Acting on those emotions could cause real damage to your wealth. Now is a good time to do a portfolio checkup. Where are you taking unnecessary risks?
In general, there are three ways to create an outcomes-based portfolio:
Starting the process on your own? It begins with setting your goals, objectives, and risk tolerance. Next is familiarizing yourself with the investment products into which you can allocate your portfolio assets. After that, it’s about periodic reviews and progress checks. Here’s a primer to get you started.
Interested in working with a pro? One way to start is with a complimentary goal-planning session with a TD Ameritrade financial consultant, who’ll create a plan with you, help you plot out progress points and develop a range of expectations for certain time frames. A financial pro will typically check in with you on those progress points to ensure you’re within the range of expectations. These portfolio checkups should happen at least yearly—more often if market conditions warrant.
If you invest in managed portfolios, performance and analysis tools will plot your progress and track the probability of hitting your target by the end date. Your “probability score” won’t move much in the beginning, but as you make progress toward your goal, you’ll likely start to see the score improve.
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Here’s why: when you begin to save, the range of outcomes starts out wide. As time passes, the range narrows, like a cone. In the early years, you might invest aggressively. That initial money would comprise a large proportion of the overall amount that you would need.
As you get closer to your goal, your investment risk becomes more conservative, and the range of expected outcomes also shrinks as the likelihood of reaching your target increases. That means you can start to estimate the end result with a little more confidence than when you first started saving.
Although outcomes-based portfolios might appear to be hands-off, they require monitoring. But the focus on outcomes will help give you peace of mind as you perform portfolio evaluations, even during market volatility. You’ll have your ultimate investing path and goals in mind.
It’s important to conduct these portfolio checkups periodically to make sure you’re still in your expected range. Investors who slip out of expected ranges may want to revisit their plans or get advice on how to adjust.
There’s another reason to evaluate portfolio progress even in market downturns: because you may be able to take advantage of market mispricings. Disciplined investors—whether they’re fully self-directed or using managed portfolios—can do this themselves. Financial professionals can help you weigh different investment possibilities to approach desired outcomes without taking on too much risk.
Have your goals changed, or do you have another goal? Financial professionals may have insight on how to pivot your strategy or save toward an additional target.
Outcomes-based portfolios can help you think through long-term savings and give you some reassurance during market downturns. It’s a basic tenet of game theory: visualize the end goal and work backward to the current scenario. Then you’re ready to play the game.
And when the game is building wealth, remember that it’s about making long-term commitments and keeping your focus on getting there. But it’s never a straight line. Downturns are bound to happen, and although they may impact today’s portfolio balance, keeping an eye on the outcome can help guide your feet on the path.
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