In this episode: In the Season 1 finale, Jon Peyton turns to investing the assets you leave the divorce with. He explains why every portfolio should be tied to your goals, how to think about the return you need and the volatility you can live with, and the choice between a passive and an active approach.
Key insights
- Tie your investments to the goals in your financial plan. Without a goal, you can’t tell whether your portfolio is on track.
- Comparing your returns with a market index can mislead you; what matters is the return your plan requires.
- The return you need, and how much volatility you can accept, shape your mix of investments.
- Market downturns stir emotions, and a neutral party can help you avoid rash decisions.
- A passive index approach can work if you can hold on through good and bad markets and rebalance regularly. Others prefer to delegate.
- Past performance doesn’t predict future results, and no plan can foresee events like the pandemic.
Episode timeline
- 0:00 Introduction
- 0:45 Season 1 wrap-up and a preview of Season 2
- 2:05 Tie your investments to your goals
- 2:56 Why index comparisons can mislead
- 4:15 The return you need
- 5:20 Matching risk to the return
- 6:00 Volatility and emotions
- 7:10 Two approaches once you have a plan
- 7:20 Passive investing with index funds
- 8:05 Fund expenses
- 8:55 Rebalancing
- 9:30 Delegating to an active manager
- 11:55 Past performance and forecasts
- 14:20 What happens without a plan
The episode in brief
A look ahead. Jon opens the finale with a preview: Season 2 brings in the professionals who support people through divorce, including divorce financial specialists, attorneys and therapists, to explain what they do, why and how it could affect you.
Tie investments to goals. Wherever your assets are now (a discount brokerage, a full-service firm or an advisory firm), connect them to the goals in your financial plan: cash needs, vacations, education, retirement. Without a goal, a return is just a number. If an index returns 10% and you’re satisfied, but your plan needs 12%, you may not discover the shortfall until you have to cut back or push the goal out.
The return you need. In the last episode’s example, someone with $500,000 and ten years to retirement needs roughly $1.2 million. Depending on how much they save and how much volatility they’ll accept, the return required might fall somewhere between 6% and 9%. That’s a wide range, and the portfolio built to pursue it could run from mostly bonds to all stocks, depending on the timeline and the investments. These figures are an illustration, not a recommendation.
Volatility and emotion. Jon has spent close to two decades helping people with their portfolios, and he’s frank that balancing volatility, emotions and cash flow isn’t easy. In 2000–2003, in 2007–2009, during the pandemic and in the 2022 decline, many people felt this market was different from every one before. The closer you are to a goal, the more a downturn can push you toward an irrational decision. A neutral party can help you slow down and think it through.
The passive approach. You can’t buy an index itself, but you can buy mutual funds or ETFs that track the S&P 500, the Dow or the Nasdaq. Their expense ratios create a small drag compared with the index. If you can truly set it and forget it through good markets and bad, a passive approach can work, as long as you rebalance: trimming what has done well and adding to what hasn’t. Jon suggests rebalancing no more often than quarterly and at least once a year.
Delegating. If you’d rather not manage it, you can hand the portfolio to an active manager. Jon mentions that Different Investments, an affiliated firm, offers active management built around each client’s financial plan. Whoever you work with, start from the return your plan requires, not from a manager’s historical performance, which may reflect more risk than you’re comfortable taking.
No one can see the future. Past performance doesn’t predict future results. Forecasts are built on yesterday’s and today’s data, and no one foresaw how the pandemic would shut down the world economy. Treat your required return as a hurdle rate. Some years you’ll be above it and some below; what matters is the long-run average.
The keys are yours. Without a plan, you could find yourself working longer, cutting expenses or relying mostly on Social Security. With one, you decide what comes next.
Key action items
- Connect each account to a goal in your financial plan.
- Find your required rate of return, and measure your portfolio against it rather than an index.
- Be honest about how much volatility you can live with before choosing your mix of investments.
- If you invest passively, set a rebalancing schedule and stick to it.
- If you delegate, ask how the manager ties your portfolio to your plan.
Listen next: Season 2, Episode 1: The Fuse Has Been Lit… Now What?
Jon Peyton previously held the Certified Divorce Financial Analyst® (CDFA®) designation and no longer holds it. References in this episode reflect his credentials at the time of recording.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.