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Lasting wealth is built by crafting a solid, thoughtful plan that can weather market volatility.
Throughout history, investors have looked for the quickest, easiest path toward prosperity. But lasting wealth isn’t built in the fast lane. It’s the result of slow and steady portfolio growth over the long term through diversifying, rebalancing, harvesting losses, assessing risk and sizing up more distant opportunities. It takes continual vigilance around spending, tax planning, estate planning and other wealth management activities.
“This is why we call our approach ‘Active Wealth,’” says Ridge Powell, managing director and wealth advisor for BNY Mellon Wealth Management’s Family Wealth Investment Advisor group. “It involves constantly planning and monitoring to take advantage of changing situations—in the markets, regulations or personal circumstances—and coordinating with multiple advisors around taxes and estate planning.”
The impact of the Tax Cuts and Jobs Act, passed in December of 2017, demonstrates the value of the Active Wealth approach, Powell says. The massive tax reform required major revisions to estate plans, income tax strategies, small business structures and other vital aspects of financial plans for many months after the law went into effect as the IRS issued revisions and clarifications.
Even on the investment side of the equation, Powell says, clients might be surprised at what percentage of their long-term returns comes down to a persistent, workmanlike attention to detail. While getting the big calls right with regard to business and economic trends is certainly important, perhaps as much of the ultimate growth of a portfolio comes from more systematic drivers, like maintaining proper diversification among stocks, sectors, investment styles and asset classes, or adhering to disciplined rebalancing back to strategic weights.
Powell uses an extreme example to make his point. “Think about some of the so-called ‘safe’ blue chip stocks that dominated portfolios 30 years ago,” he says. “Thirty years later, anyone who held on to a dozen or so of those names as part of a buy-and-hold strategy could be looking at a significant loss in relative value. Rebalancing helps limit your exposure to risk that often only seems obvious in hindsight. It also keeps you from holding positions that have increased in price and encourages you to buy a cheaper asset that has more room to appreciate. Repeat that on a regular basis and, as markets move up, that’s how you avoid losses and little by little really see an accumulation of wealth.”
A sound wealth plan requires hard data on investment fundamentals, compounding return trajectories, expenses and tax law. But toss in the stress of a sharp market decline, a job loss or a divorce, and that’s when a good rapport and an open line of communication with a trusted wealth advisor become crucial components in long-term success.
Powell says that, back at the end of 2018, when the S&P 500 posted its worst December decline since 1931, a client asked to sell off his stock positions. “I recommended that the client take a step back and think it over. First of all, if you want to harvest any losses to offset gains, next year would be a better time for you from a tax standpoint. Then I provided some insight into why what we were seeing in the markets at the time seemed like an overreaction and why it made sense to stay invested.”
In such situations, Powell says, it also never hurts to revisit the stark numbers: Over the past 40 years if, during bouts of volatility, you had waited for things to settle down and missed the stock market’s 10 best trading days, your cumulative return today would be 52% lower than if you had stayed invested.
The client resisted the impulse to sell and was thankful later, Powell says, noting that talking through the situation prompted further planning to gift appreciated stock to charity to fulfill philanthropic goals.
Short-term thinking isn’t only a problem during times of market volatility. At the opposite extreme, some clients stick to stock positions that expose them to unwise levels of risk. Investors who built their own companies are prone to this because they understand their own business better than any other, Powell says.
But single-stock risk can have disastrous consequences if the concentrated position declines. “Entrepreneurs tend to view diversification as giving up control, and it often runs counter to what it means to them to grow their wealth,” Powell says.
Sometimes the answer is a compromise, such as an agreement to allocate an overweight—but fixed—portion of a portfolio to a company stock, even if it means continually paring it back to rebalance while diversifying the rest.
Staying the course, carefully allocating assets and diversifying—these steps may not seem glamorous. But they’re critical to growing wealth and are far more likely to lead you down a successful path.
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