Friday, February 26, 2016

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.