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
OBJECTIVE:
Save $1,000,000 for retirement, adjusted for inflation.
CONSTRAINTS:
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.
SAVING OR SPENDING TARGET:
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.
ASSET ALLOCATION TARGET:
70% allocated to diversified stock funds, 30% allocated to diversified bond funds.
Allocation to foreign investments as appropriate.
REBALANCING METHODOLOGY:
Rebalance annually.
MONITORING AND EVALUATION:
Periodically evaluate current portfolio value relative to savings target, return expectations, and long-term objective.
Adjust as needed.
Showing posts with label investment strategy. Show all posts
Showing posts with label investment strategy. Show all posts
Friday, February 26, 2016
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.
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.
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.
Monday, January 25, 2016
Riding the Roller Coaster
I have never been a fan of roller coasters; I consider them torture. Yet my older son can spend an entire day riding them - the higher, twistier, upside-down/inside-out, the better! But even he is not enjoying the volatile ride the markets have been taking these past few weeks and months.
Some folks view roller coasters as frightening.
Some find them exhilarating. How do you react to market volatility?
I will assume you have some money invested in the stock/bond/commodity markets. Maybe you have a 401k through work, an IRA or a 529 plan that holds a variety of funds.
Hold on tight, close your eyes, go for the ride!
1. DO NOT, repeat Do Not watch the TV constantly monitoring the daily market moves. We all know TV sensationalizes events.
2. Do Not check your accounts hourly, daily or weekly. This breeds dread, confusion and despair. Reviewing quarterly reports will suffice.
3. Take advantage of the opportunity to buy low if this is part of your investment strategy to increase certain positions. Yes, stocks may go a bit lower but they are way down from frothy highs. Remember "buy low, sell high".
4. Reassess your risk tolerance. Have you been anxious, upset and losing sleep these past few weeks? Perhaps you thought you could handle more risk. Or maybe you are closer to retirement or buying a house and feel the need to be more protective of your money. Give yourself some time before reallocating.
5. Hopefully you have an investment strategy, If so, stick with it. If not, now is not the time to implement one.
A good investment strategy will help you ride out the peaks and valleys of the market and provide guidance in achieving your financial goals.
In times like these it is helpful to remember, in order to generate the type of long-term returns that create wealth, you must accept a certain amount of risk. With that risk comes volatility. The key is not to take steps to avoid the risk altogether, but to manage the risk where possible.
Be $ Smart - Imagine the market as a living, breathing organism. It cannot inhale or exhale indefinitely. Have a plan to take advantage of market moves.
Some folks view roller coasters as frightening.
Some find them exhilarating. How do you react to market volatility?
I will assume you have some money invested in the stock/bond/commodity markets. Maybe you have a 401k through work, an IRA or a 529 plan that holds a variety of funds.
Hold on tight, close your eyes, go for the ride!
1. DO NOT, repeat Do Not watch the TV constantly monitoring the daily market moves. We all know TV sensationalizes events.
2. Do Not check your accounts hourly, daily or weekly. This breeds dread, confusion and despair. Reviewing quarterly reports will suffice.
3. Take advantage of the opportunity to buy low if this is part of your investment strategy to increase certain positions. Yes, stocks may go a bit lower but they are way down from frothy highs. Remember "buy low, sell high".
4. Reassess your risk tolerance. Have you been anxious, upset and losing sleep these past few weeks? Perhaps you thought you could handle more risk. Or maybe you are closer to retirement or buying a house and feel the need to be more protective of your money. Give yourself some time before reallocating.
5. Hopefully you have an investment strategy, If so, stick with it. If not, now is not the time to implement one.
A good investment strategy will help you ride out the peaks and valleys of the market and provide guidance in achieving your financial goals.
In times like these it is helpful to remember, in order to generate the type of long-term returns that create wealth, you must accept a certain amount of risk. With that risk comes volatility. The key is not to take steps to avoid the risk altogether, but to manage the risk where possible.
Be $ Smart - Imagine the market as a living, breathing organism. It cannot inhale or exhale indefinitely. Have a plan to take advantage of market moves.
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