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46 MILITARY OFFICER SEPTEMBER 2016
Understanding the correlation between current events and managing your portfolio is crucial. Lt. Col. Shane Ostrom, USAF (Ret), CFP®, explains why.
When the British recently voted to secede from the EU, did you fi nd yourself worrying about what would happen to your investment portfolio? This is a perfect example of how every
day we are either entering a crisis, in a crisis, or exiting a crisis. If you fi nd your portfolio management has to fl ex with the crisis du jour, you need a better plan. An investment plan based on crisis man- agement or emotions stirred by a crisis is a plan that won’t work.
Good portfolio management expects
the unexpected. Proper portfolio man- agement also is about managing to risk. In this case, risk could be considered the U.K. potentially leaving the EU. To- morrow it could be a fi nancial bubble or terrorism. Your money serves diff erent purposes. Some must be available for short-term needs like emergencies. Some is for mid- term needs, such as saving for a home. Some is for long-term needs like retirement. Some might be used to generate income. Each of these fi nancial objectives requires a diff erent money-management strategy. Short-term savings must be stable and liquid at all times because when you need the money, it must be available for use. You likely won’t make a return on your short-term savings, but that’s not the point. The point of short-term money is stability and availability. Long-term money, on the other hand, requires a return that allows you to off -
set the damage of taxes and infl ation over time and earn excess returns to build wealth. You won’t be touching this money for a long time. Short-term vola- tility is not the point — long-term gains are the point. In order for your long-term money to work harder, you need crises such as the U.K. exiting the EU. As I often reiterate, for average inves- tors to build wealth for long-term needs, the investment markets must go down for dollar-cost averaging to work. You need a portfolio strategy designed to take advan- tage of short-term drops in the markets. Short-term drops are our only chance to buy at sale prices before the markets con- tinue their constant movement upward. So is the British exit a big deal? Absolute-
ly. It drove down the markets so that your next contribution to your 401(k), Thrift Savings Plan, or individual retirement ac- count will take advantage of lower prices. Some investors expected (even wanted) a market drop (the reason doesn’t matter) and planned for it and took advantage of it. To fi ll in the details of what I’ve left out in this article, search
www.moaa.org for “average down,” “allocation,” and “re- balance” and read the articles labeled as “fi nance” in the list of titles.
MO
— Lt. Col. Shane Ostrom, USAF (Ret), is a CFP® and benefi ts information expert at MOAA. Visit
www.moaa.org/fi nancialcenter for other re- sources. Email specifi c benefi t and fi nance inqui- ries to
beninfo@moaa.org.
PHOTO: SEAN SHANAHAN
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