Friday, February 26, 2016

Creating an Investment Strategy - Part 3

Over the past few weeks we listed the components for creating a strategy; now is the time to actually write one. The purpose is to keep us on track to build wealth and attain our financial goals and dreams.

It can be as simple or complex as you need it to be. It's YOUR road map.
You may revise it as life moves along.

Below, is an example I found on the Internet. It is very simple and will give you an idea of how to construct yours. Start simply, you may always add to it, and most importantly, PUT IT IN WRITING. It will be your guide to the future. Without a map, who knows where you may land!

If you need some help, feel free to send me an email.

Be $ Smart - Review the previous steps to create your own investment strategy to build wealth and ensure a financially secure future.

Sample Investment Strategy

Save $1,000,000 for retirement, adjusted for inflation.

30 year horizon.
Moderate tolerance for market volatility and loss, no tolerance for nontraditional risk.
Current portfolio value, $50,000.
Monthly net income of $4,000, monthly expenses of $3,000.
Consider the effect of taxes on returns.

Willing to contribute $5,000 in the first year.
Intention to raise the contribution by $500 per year to a maximum of $10,000 annually.

70% allocated to diversified stock funds, 30% allocated to diversified bond funds.
Allocation to foreign investments as appropriate.

Rebalance annually.

Periodically evaluate current portfolio value relative to savings target, return expectations, and long-term objective.
Adjust as needed.

Creating an Investment Strategy - Part 2

Last week we took the initial steps in developing an investment strategy. Did you write them down? Putting things in writing (goals, promises, commitments) adds a dimension, a connection to the universe that helps propel you forward.

As you build your strategy here are some steps to follow:

1. State your investment goals and objectives clearly.
(some goals might be retirement, new home, kids education, second home, world travel, build wealth.)

2. Determine your time horizon.
(next year, in five years, 10 years? Time helps gauge the amount of risk.)
For multiple goals you may have multiple time frames.

3. Describe your return expectations.
(low risk = low return, high risk brings higher potential for both gain/loss.)

4. Detail the level of risk you are willing to take.
(I call this the "sleep factor" - how much money must I keep absolutely safe in order to sleep at night. Set that money aside in safe investments: CD's, U.S. Treasuries, stable value funds, and invest the rest accordingly.)

5. Assess your liquidity needs.
(how much cash must you be able to get at any given time.)
This keeps you from selling investments at the wrong time.

6. Decide who will monitor your portfolio?
(you, a broker, a money manager?)

7. Include a schedule for rebalancing your asset allocation ( mixture of stocks, bonds, cash, alternatives) - quarterly, annually?
Each component will grow at a different rate; rebalancing brings them back to your original proportions.

Be $ Smart - follow the steps, write them down, create your strategy, build your wealth.

Next time we will view a sample investment strategy.

Creating an Investment Strategy - Part 1

When I wrote about market volatility last week, I mentioned "sticking with your investment strategy". Most folks never heard of an investment strategy and many financial advisers have neglected to develop one with their clients.

Let's review what is involved in building that strategy.

An Investment Strategy is your written statement that lists measurable goals and hopefully, shows repeatable results:

1. You must be able to assess and state your tolerance for risk (how much money you are willing to lose for potential gain?).

2. Determine your rules for buying and selling (both stocks and bonds).
Will it be decided by a certain percentage up or down? Will it be a target price? Having a rule removes emotion and allows you to act decisively.

3. Make provision for transaction costs( both commissions and fees).
Will you pay a fee for AUM (assets under management - anywhere from 1% to 2.75%) or will you pay straight commission for each buy/sell transaction? Or will you use a wrap fee that includes all?

4. Decide your preference for passive index funds (which may minimize taxes) or actively managed funds.
Passive funds pick a benchmark and rarely change the holdings whereas an actively managed fund has a manager or team who buys and sells at their discretion towards a stated objective.

5. Choose a Benchmark for comparison and measurement.
In order to measure the performance of your portfolio you must have something to measure it against. You may choose the S&P 500, the top 500 U.S. companies, the Dow Jones Industrial Average, the top 30 domestic companies or some other way to compare and measure how well or poorly your portfolio is performing.

Be $ Smart - with a written Investment Strategy you create the playbook to manage volatile markets.

Let me know if you need help writing your Investment Strategy. I'd be happy to offer guidance. Part 2 next week.