Setting Up the Right Investment Strategy After Divorce

Navigating the responsibility of managing your investments after a divorce can feel challenging, but it's also an opportunity to take control of your financial future. Here’s a step-by-step guide to help you set up a solid investment strategy that aligns with your new life goals.

Step 1: Start with a Plan

Successful investing is based on simple, time-tested principles. But just because something is simple doesn’t mean it’s easy. The best way to start is by defining your purpose and putting a plan in writing. A written financial plan is crucial because it produces better results. According to the Charles Schwab 2021 Modern Wealth Survey, people with a written financial plan were three times more likely to feel “very confident” in reaching their financial goals compared to those without one.

Investment markets are constantly shifting, but at the root of every investment goal there are things you can quantify. Of all the things that can be quantified, your investment time horizon is perhaps the most important.

To assess your time horizon ask yourself, “When are your investment dollars needed?” and “How long does your money need to last?”. The meaning of time is fundamentally different for people who are earning money and growing assets compared to investors who are withdrawing from their assets to meet spending goals.

 Step 2: Know the Basics of Stocks and Bonds

Among countless investment options, there are just a few building blocks which form the foundation of your portfolio. Understanding the fundamentals helps explain how these parts work together in a diversified portfolio.

Cash

While cash is not typically used for long-term investing, it is familiar and easy to understand. If you hold cash, you are a saver. You make money by earning interest, but the return is very low, especially after inflation. Cash is best for emergency reserves, short-term needs, and providing a feeling of security.

Bonds

If you own a bond, you are essentially a lender. Government entities and corporations issue bonds to raise money, and they are obligated to pay the money back with interest. Bonds are best for time horizons of 2-5 years, generating steady income, and providing stability to offset the higher risk of stocks.

Stocks

If you own stock, you are essentially an owner; you own a small percentage of a publicly traded company. Stocks are best for long-term goals, saving for retirement, and building wealth. They offer higher potential returns but come with greater risk compared to bonds.

Step 3: Create a Personalized Investment Strategy

Source: Carl Richards, behaviorgap.com

Your investment plan should be tailored to your specific goals and risk tolerance. A successful investment strategy can be simplified down to the three “Ds” of investing:

• Destination – this is defined by time horizon which is critical to determine the amount of risk an investor should assume.
• Diversification – an appropriate mix of stocks, bonds and cash. Nobel laureate, Harry Markowitz, once famously said, “Diversification is the only free lunch in investing”. Eat up!
• Discipline – Market swings are a certainty. As an investor, be prepared for this reality and respond with logic rather than emotion.

Choosing the right stock-to-bond mix is essential for building a successful investment portfolio, as it balances potential returns with your comfort level of risk. A higher stock percentage offers greater growth potential alongside increased volatility. Whereas a higher percentage of bonds relative to stocks gives a higher likelihood of stability, but lower return expectations. Thoughtful consideration of these elements enables you to create a portfolio designed to maximize your chances of achieving your objectives while managing the impact of market swings.

Bond Side of the Portfolio

• Consider:
  • Short duration and high-quality bonds: Short-term bonds are less sensitive to big price swings as interest rates go up or down. Additionally, high quality bonds have less equity-type risk, compared to high-yield or “junk” bonds.

Stock Side of the Portfolio

• Consider:
  • Broad equity diversification: Rather than buying one or even small handful of stocks, a commonly used and reasonable approach is to “buy the haystack” rather than look for the needle (next big winner) in the haystack. This can be accomplished through investment vehicles such as mutual funds and/or exchange traded funds (ETFs).
    • • You can further diversify by incorporating stocks that are:
      • • Large, medium, and small sized companies
      • • Value (less popular/cheaper) and Growth (popular/pricier) companies
      • • US stocks and international stocks

With so many options to consider, navigating the complexities of asset allocation can feel daunting. Consider consulting with a financial professional such as a Certified Financial Planner® to help you determine an appropriate strategy customized to your needs.

Step 4: Embrace Total-Market Returns

It's important to embrace total-market returns, which means investing in a broad range of assets to capture the overall market performance. This approach reduces the risk of trying to pick individual winners and losers. Imagine the collective stock market (buyers and sellers) as a giant computer that constantly processes all the news, data, and opinions about a company. This information influences the stock price as people buy and sell shares. Because of this continuous and extremely rapid flow of information, the current stock price is generally considered a fair estimate. Said another way, if you read something online or see something on TV about a stock it is already priced into the stock and information of little use.

It is also advisable to avoid market timing, which involves trying to predict market movements. Market timing is risky as it can lead to buying high and selling low and emotional decision making, which often negatively impacts returns. Even relying on “expert” opinions on the future of the stock market can lead to risky decisions. Howard Marks, Co-founder and Co-chairman of Oaktree Capital Management, advises, "Most macro forecasts are likely to turn out to be either (a) unhelpful consensus expectations or (b) non-consensus forecasts that are rarely right. In areas entailing great uncertainty, agnosticism is probably wiser than self-delusion."

Step 5: Monitor and Adjust Your Portfolio

Rebalancing is an important process of resetting your investment assets to your targeted allocation. Beware, that at times it won’t “feel good” to make a rebalancing adjustment. For example, you may just want to let it run when markets are doing well or leave it alone when markets are down. This is a time to lean on the third “D” of investing, maintain discipline and take action.

A simple example of how to monitor your portfolio for rebalancing opportunities is to set a regular schedule, such as quarterly or annually, to review your asset allocation. If your portfolio has drifted from your target allocation, you can rebalance by selling assets that have performed well and buying assets that have underperformed.

You can ensure your investment portfolio remains aligned with your goals by staying informed and seeking professional advice when needed. Remember, investing is a marathon, not a sprint. Stay patient and focused on your long-term goals.

Conclusion

Starting your financial journey solo after a divorce can be daunting, but with the right strategy, you can build a secure and prosperous future. Embrace this new chapter with confidence and take control of your financial destiny.

Investment advice, financial planning, and retirement plan services are provided by Prosperity Planning, Inc., an SEC registered investment advisor. The information contained herein, including but not limited to research, market valuations, calculations, estimates and other material obtained from these sources are believed to be reliable. However, Prosperity Planning, Inc. does not warrant its accuracy or completeness. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. If an offer of securities is made, it will be under a definitive investment management agreement prepared on behalf of Prosperity which contains material information not contained herein and which supersedes this information in its entirety. Any investment involves significant risk, including a complete loss of capital and conflicts of interest. Certain risks are summarized below. The applicable definitive investment management agreement and Form ADV Part 2A will contain a more thorough discussion of risk and conflict, which should be carefully reviewed before making any investment decision.