Wealth management experts use a variety of strategies to grow and protect your assets. They can help you develop a comprehensive investment strategy, manage your retirement accounts and coordinate tax planning.
They can also help you monetize your business, transfer ownership to family members and establish philanthropic programs. But implementing these strategies on your own can be expensive and time-consuming.
A portfolio’s asset allocation, or a mix of investment types, is essential to whether you’ll reach your financial goals. Considering your risk tolerance, investment horizon, and liquidity needs is critical.
A wealth management expert like Frederick Baerenz will recommend an asset allocation strategy tailored to your needs. For example, if you’re saving for a short-term goal like a home purchase, your advisor may want to include a significant amount of cash or cash equivalents to ensure the money is available when needed.
Your advisor will also consider your current age when determining your asset allocation. Younger investors can afford to take more risks because they have more time for their investments to grow, while older people may prefer to diversify into bond and cash investments.
Diversification is spreading your investments across unique assets to mitigate risk. It involves separating your investments into asset categories such as stocks, bonds, cash equivalents, etc. Investing in different asset classes helps reduce concentration risk and improve returns by reducing overall market volatility.
It’s the same concept as the adage, “Don’t put all your eggs in one basket.” If all your assets are in the same sector, your entire portfolio will suffer if that sector goes down.
Diversification also consists of diversifying within each asset class to spread the risks associated with different industries and geographies. For instance, investing in stocks from developed countries and emerging markets exposes you less to unsystematic risks such as political or economic turmoil.
Tax-loss harvesting can be valuable in market volatility, especially for investors with taxable brokerage accounts. The strategy can mitigate taxes by generating capital losses that offset future gains and ordinary taxable income.
While the strategy could be more effective in tax-deferred accounts such as 401(k)s and IRAs, it can help manage the impact of gains on portfolios held in taxable brokerage accounts. The strategy is based on the established psychological phenomenon known as the disposition effect, which refers to our tendency to sell assets that have increased in value while hanging onto those that have dropped.
The IRS has specific rules for utilizing capital losses, including the wash-sale direction and the inclusion rate. As such, it is essential to work with a wealth management expert who can execute this strategy on behalf of clients while keeping all aspects of the portfolio in line with their overall investment objective and risk tolerance.
A rebalancing strategy seeks to return your investments to your original asset allocation goals. For example, a portfolio heavily weighted in stocks this year might shift significantly to bonds next. And investments that performed well this year may become speculative the next, meaning their weighting should be reduced to maintain your desired risk tolerance.
Many advisors or experts like Fred Baerenz may recommend rebalancing quarterly, semi-annually, or annually. In contrast, others prefer to rebalance when an investment group moves away from its target by a specific percentage threshold. Rebalancing can also be an excellent opportunity to take advantage of tax-loss harvesting when it is done in taxable brokerage accounts. This can help offset profits inflated in the market and reduce your overall tax bill.
Wealth managers specialize in helping wealthy clients protect their assets and financial legacy. They can provide investment planning, retirement, estate planning, tax strategies, and more expertise. They also offer guidance on funding education, utilizing insurance, and other complex risk and legal issues.
While certified financial planners can help anyone, they often require a minimum amount of investable assets. If you have over a few hundred thousand dollars in investable assets, a wealth manager can guide you in growing your portfolio and protecting your financial legacy.
Rising interest rates, economic volatility, and a complex investing landscape make having a wealth preservation strategy more important than ever. A comprehensive plan should include a savings account, investments in diversified asset classes, an emergency fund, and insurance.