Investment planning matters to every investor — and understanding these five core investing concepts can help you become a more confident investor.
Investment planning is an important part of meeting your long-term financial goals. Douglas Beath, Wealth Investment Solutions Analyst with Wells Fargo Investment Institute, says whether you’re new to investing or want to be more hands-on with your investment planning, there are four important investing concepts every investor should know: investment risk, cash on hand, time horizon, and rebalancing. These concepts can help you make informed decisions about your financial goals and maintain an investment plan that adapts to market changes.
Investment planning and risk
Investment risk refers to the potential for your investments to lose value. If you need to sell when an investment has lost value, you will lose money. Different asset classes pose different risks (stocks tend to be more volatile than bonds, for example), and investors have different risk tolerances (what’s risky for some may not be for others).
Panic selling is often not a good long-term investment plan.
How it affects your portfolio: It’s important to understand your risk tolerance as part of your investment planning so you can shape your portfolio accordingly. Beath suggests working with your advisor to determine how much risk you might be comfortable with. Are you financially prepared for a volatile market where values could rise and fall dramatically? Can you handle market dips? This will impact your investment choices.
Beath adds that investment risk also highlights the importance of a diversified portfolio — strategically spreading your investments across different asset types — to help manage risk so you can remain calm during market downturns and avoid reacting emotionally and potentially locking in losses. “Panic selling is often not a good long-term investment plan,” he says.
Reevaluate your investment risk often, especially when there are changes in your financial situation, investment goals, or market conditions. Work with your advisor to adjust your portfolio if necessary.
Cash on hand
In the context of investment planning, cash and cash alternatives refers to liquid assets in your portfolio — funds that are readily accessible without having to sell investments or incur penalties. This can include cash in your bank account, money market funds, or short-term investments — like three-month Treasury bills — that you can easily convert to cash.
How it affects your portfolio: Cash on hand provides a funding source when investing opportunities or unexpected expenses arise. This is especially true during a trading range — a time when stocks, bonds, or commodities regularly fluctuate between consistent high and low points. “When you’re expecting a trading range, it’s good to have cash on the sidelines to invest or use for emergencies,” says Beath.
However, having too much cash on hand could limit your growth potential, while having too little could leave you vulnerable to risk.
Beath says an advisor can help assess how much cash you hold, which could be impacted by financial events like a home purchase, pending retirement, or a tax refund. You should revisit your cash allocation any time your financial goals change or if you notice significant market shifts.
Understanding your time horizon
Investment planning is affected by your time horizon — how long you hold an investment before you need access to its funds. Time horizons can range from short-term (a few years) to long-term (several decades), depending on your financial goals. For example, investing in a retirement account typically has a longer time horizon than investing for a child’s college expenses or a home purchase.
How it affects your portfolio: Beath says that, generally, a longer time horizon allows for a more aggressive portfolio, with a higher allocation to equities, since there’s more time to recover from market downturns. “If you’re not planning to retire in the next 20 years, you might consider an investing strategy more heavily allocated to stocks,” he says. Meanwhile, a shorter time horizon may require a more conservative approach that emphasizes stability and liquidity.
Beath recommends reviewing your time horizon and investment planning strategy with an advisor as the date when you need the money draws near: “The closer you get to paying for a specific financial goal, such as paying a child’s college tuition or a down payment on a house, the more you should focus on restructuring your portfolio to make sure it’s aligned with your needs.”
Rebalancing to keep financial goals on track
Investment planning is impacted by market fluctuations, which may cause a portfolio to become too concentrated in a certain asset class over time. When this happens, you may need to sell some assets and purchase others to maintain your desired level of risk and return. This is known as rebalancing your portfolio.
How it affects your portfolio: Rebalancing may help you stay true to your overall investment strategy by aligning your portfolio with your risk tolerance and financial goals. Beath suggests that regular rebalancing may also provide opportunities: “Unlike chasing returns or trying to time the market, rebalancing is a disciplined approach to investment planning that may allow you to buy low and sell high with certain asset classes.”
Beath recommends rebalancing at least annually — or whenever there’s a significant change in the market or your personal financial situation.
Again, he suggests working with an advisor to address your specific financial situation: “When the market gives you an opportunity to increase or decrease your exposure to a particular asset class, you should have a plan. How will it impact your asset allocation? What will buying or selling stocks mean for your taxes? Will you have enough cash to cover any taxes owed? That should all be considered in your approach.”
Wells Fargo Investment Institute, Inc., is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
