In this edition of our Financial Literacy series, we’ll guide you through the maze of basic investment strategy options.
At HighPoint Advisors, LLC, we aim to help clients in Syracuse, central New York, and other markets make informed decisions as they begin (or continue) the journey toward financial independence. Whether you’re new to investing or looking to expand your portfolio, having a working knowledge of various investment strategies is crucial for working toward your financial goals.
Things to Consider as You Think About Building a Portfolio
- Active vs. Passive Investing: Active investing, as the name implies, involves actively managing a portfolio, to achieve a certain outcome. That outcome could be outperforming a certain market, reducing risk in a portfolio, or hedging various conditions, to name a few. Active investment may mean selecting specific individual stocks (or other financial instruments) or attempting to predict market movements, depending on the objective. This approach generally requires significant research, time, and expertise. On the other hand, passive investing aims to simply match the performance of a market index, such as the S&P 500, by investing in the components of the given index. This is easily accomplished by investing in low-cost index funds or exchange-traded funds (ETFs) in most cases. It’s a more hands-off approach, typically characterized by lower fees and reduced effort.
- ESG Investing: Also known as Socially Responsible or Sustainable Investing, ESG investing refers to selecting investments based on their adherence to a range of environmental, social, and corporate governance criteria. These criteria are integrated into investment decisions, and most ESG funds are actively managed. ESG-conscious investors seek to support companies or financial instruments that prioritize sustainability, social responsibility, and ethical practices, among other considerations. ESG investing offers the potential for financial returns while aligning investments with personal values and societal impact.
- Diversification: Diversification is one of the first things to consider when investing. As a key principle of investing, diversification involves spreading your investments across different asset classes, industries, and geographic regions. One of the benefits of seeking diversity in your portfolio is that it may reduce overall risk or possibly enhance returns. By diversifying your portfolio, you can potentially minimize losses during market downturns while capturing gains from various sectors or regions experiencing growth. In other words, it may add some needed balance to a portfolio in difficult times.
- Risk Tolerance and Time Horizon: To ensure that your portfolio is appropriate for you, it’s important to understand your risk tolerance and time horizon. Risk tolerance refers to your ability and willingness to withstand fluctuations in the value of your investments as markets go up and down over time. Generally, younger investors with a longer time horizon can afford to take on more risk, as they have more time to recover from market downturns. Conversely, sometimes investors planning for retirement (or some other major goal, such as planning for college) may prefer a more conservative approach to preserve their capital as their timeline to their goal shortens. These are individual decisions but remember that matching investments to your comfort level is usually a good idea.
Frequently Asked Questions About Investing
How Do I Determine My Risk Tolerance?
Your risk tolerance depends on factors such as your financial goals, investment timeframe, income level, the amount you have available to invest, and comfort with volatility. Consider taking a risk assessment questionnaire or consulting with a financial advisor to evaluate your risk tolerance accurately.
Your risk tolerance depends on factors such as your financial goals, investment timeframe, income level, the amount you have available to invest, and comfort with volatility. Consider taking a risk assessment questionnaire or consulting with a financial advisor to evaluate your risk tolerance accurately.
What Are the Benefits of Passive Investing?
Passive investing offers lower fees, reduced amounts of portfolio transactions, and the potential to closely match the return of a given index or benchmark over time. It’s an excellent option for investors seeking simplicity and consistency.
Passive investing offers lower fees, reduced amounts of portfolio transactions, and the potential to closely match the return of a given index or benchmark over time. It’s an excellent option for investors seeking simplicity and consistency.
What Are the Drawbacks of Passive Investing?
A passive investment will not deviate from its benchmark. That means that if a fund seeks to track the S&P 500 index, then it will deliver a portfolio that will closely represent, and perform as, the S&P 500 index. It will not research the components of the index that have more investment merit than others, and it will not adjust the portfolio as the economy changes over time. A passive investment will not seek to outperform its benchmark, nor will it attempt to reduce the risk of its benchmark. It will only seek to mirror its benchmark.
A passive investment will not deviate from its benchmark. That means that if a fund seeks to track the S&P 500 index, then it will deliver a portfolio that will closely represent, and perform as, the S&P 500 index. It will not research the components of the index that have more investment merit than others, and it will not adjust the portfolio as the economy changes over time. A passive investment will not seek to outperform its benchmark, nor will it attempt to reduce the risk of its benchmark. It will only seek to mirror its benchmark.
If I Invest in an ESG Portfolio, Will I Have to Sacrifice Returns?
No, ESG investing has demonstrated the potential (and history) to generate competitive financial returns while aligning investments with environmental, social, and corporate governance objectives. Research shows that companies with strong ESG practices may be more resilient and better positioned for long-term success. Part of the reason for this is that companies that adhere to ESG principles tend to be less likely to be caught up in corporate scandals or environmental disasters, for example.
No, ESG investing has demonstrated the potential (and history) to generate competitive financial returns while aligning investments with environmental, social, and corporate governance objectives. Research shows that companies with strong ESG practices may be more resilient and better positioned for long-term success. Part of the reason for this is that companies that adhere to ESG principles tend to be less likely to be caught up in corporate scandals or environmental disasters, for example.
Putting Your Investment Plan Into Action
In conclusion, selecting the right investment strategy involves considering your financial objectives, risk tolerance, desire for diversification, time horizon, and personal values. Whether you choose active or passive investing (or maybe a combination of both), ESG integration, or increased diversification, the key is to stay informed, stay disciplined, and stick to the plan. Remember, investing is a marathon, not a sprint! So, start early, invest regularly, and let time and compounding work in your favor.
At HighPoint Advisors, LLC, our advisors have many years of experience navigating the ever-changing financial markets for clients of all ages and stages in life. We can help early investors in Syracuse, central New York, and beyond make sense of the complexities of building a portfolio, as well as help manage portfolios over time. Our advice can be helpful in both building confidence as an investor, as well as guiding toward specific financial goals.
Contact us today. Let us help you take the next step in your investing journey.
Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss. All indices are unmanaged and may not be invested into directly.
Socially Responsible Investing (SRI) has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.