Believe it or not, even individuals who have amassed significant wealth aren’t confident investors 100 percent of the time. This can be especially true when financial markets are particularly volatile.
“Otherwise-confident people may second-guess their investment choices when they realize that the financial markets are out of their control,” observes Erik Davidson, Executive Vice President–Chief Investment Officer for Wells Fargo Private Bank.
The truth, of course, is that no one can control the economy or the financial markets. But when you acknowledge this fact and your investment choices still make you feel uneasy, it’s time to ask yourself—and your wealth advisor—some key questions. Here are a few to start with.
1. How far in the future are your financial goals?
To use a golf analogy: Golfers carry a variety of clubs, each designed to hit the ball a different distance. They use a putter for a short shot, on the green and near the hole. But they will likely choose a driver for a very long-distance shot.
The same approach makes sense for your investments, says Davidson. “You want to use certain types of investment strategies for short-term goals, like starting a business in three years, and other strategies for long-term goals, like passing wealth to the next generation,” he explains. Your wealth advisor can help you determine the right strategies to help meet your goals on time.
2. Do you fully understand your investments?
No matter how successful and intelligent you are, it’s very common to have a few gaps in your financial knowledge. (See “Four Investment Strategies You’re Afraid to Admit You Don’t Understand.”) Likewise, your confidence can waver when you realize you’re not sure how all of your investments work and what to expect from them, says Davidson.
“You’re not supposed to be a financial expert,” Davidson says as a reminder. However, you can easily increase your knowledge and be a more confident investor by reading materials your financial professional sends, attending financial events, and simply asking your advisor as many questions as necessary. “Investor education is a huge part of our advisors’ responsibilities,” he says.
3. Are your investments well-diversified?
Not putting all of your financial eggs in one basket is a cornerstone to becoming a confident investor. “Diversification can help give you an all-weather portfolio that’s designed to handle economic rain and snow, but also grow when the financial markets are sunny,” says Davidson. (See “Five Potential Benefits of Diversification.”)
There are many ways to diversify your portfolio. For instance, diversification often means seeking out:
- Different asset groups: Stocks, bonds, real estate, commodities, and alternative investments (for those who qualify)
- Geographic variety: International stocks, as well as U.S. equities
- Different-size companies: A mix of large-cap (typically companies with a market capitalization of $10 billion or more), mid-cap (typically $2 billion to $10 billion) and small-cap (less than $2 billion) stocks
- Different sectors: A mix of stocks and bonds that cover a range of sectors, such as industrials and financials
4. Are you “buying and holding”?
If so, Davidson says you should consider a slightly different approach: buying and managing. However, managing does not mean making frequent trades within your portfolio. Instead, it means monitoring your investments and discussing them with your investment professional.
“You’ll feel more confident about your investments if you don’t leave them on autopilot,” Davidson says. Your financial goals could shift, your temperament for risk might change, or fluctuations in your portfolio may have left you overexposed in certain investment classes—which could signal a need to rebalance your portfolio.
“Regular check-ins with your investment professional can help you stay on top of these shifts and feel more comfortable with your financial choices,” suggests Davidson.