One of the most important investment principals we have here at Cedarstone is understanding your specific situation. This may seem basic but unfortunately, it is a step we often see ignored as other professional’s rush to offer up a proposal. The simple reason we take the additional steps to understand your goals is that depending on what and when they are, there can be dramatic differences in how you should be invested.
The simplest variable and the one that has the most impact is time. The rationale is simple if your goals are shorter term in nature, the possible outcomes are much more volatile. In some ways that may seem counter-intuitive, one would imagine it would be easier to predict things that are about to happen instead of a long-term time horizon.
However, when you examine the chart above, what you see is that the range of possible outcomes start to shrink as your time horizon extends. The 1-yr data shows just how wide the possibilities are when it comes to potential investment returns. If preserving capital over a short time frame is the goal, say like buying a home in the next year, being conservative with the assets makes sense. There are too many potential outcomes to be aggressive and no proven way to predict successfully and consistently what they will be in the short-term.
Once you extend the time horizon even to just five years, the range of possibilities begins to narrow dramatically. This allows us to confidently take additional risk because the market returns become more predictable over time. This chart is part of the reason we are also hesitant to deviate from our investment strategy. If you are changing your allocation every year, your range of potential outcomes starts to look like the 1-year even over the long term.
There are many different factors when we make our investment recommendations: draw rates, taxes, other income sources, etc. However the most important will always be time.