We Use a Six-Step Investment Process To Help Meet Your Financial Goals
From setting goals to tracking your progress, the most successful investors start with a plan. With this in mind, Investor Resources follows a six-step process to help you meet your financial goals. Why? Because our experience shows that investors too often make decisions based on emotions, rather than carefully planning their future based on key economic and market indicators. Therefore, starting with the right plan is vital to the performance of your investment efforts.
Step 1. Financial Discovery
It starts with the basics; clarify your investments goals! To solidify your primary goals, ask yourself some questions:
- What are you investing for - college tuitions, retirement, a second home?
- How much time can you allow to meet your goals? Keep in mind that the longer you allow your investments work, the better chance for success.
- Where does your net worth stand in relation to those goals? More specifically:
- What is your amount of investable assets?
- How much of your income you can put toward those goals?
- What are your liquidity (cash flow) needs?
The answers to these questions will tell you how close you currently are to meeting your goals - or how far away. Then be ready to answer the big question:
- How will I close the gap between where I am today and where I want to be in the future?
Step 2. Build An Efficient Portfolio
Understanding your financial goals and tolerance for risk will help us identify an efficient portfolio that will provide you with the greatest potential return consistent with your target risk profile. As an investor looking to maximize your success, you should select only from those portfolios which fall along the efficient frontier. How can you determine this?
Here are 5 asset allocation techniques used by the world's most successful investors!
1. Understand the risk and return characteristics of each asset class.
Review the performance history for each asset class including large and small cap US stocks, fixed-income securities, international equities, and cash. For example, stocks have outperformed other assets classes by wide margins over time. Next, you measure the risk in each asset class using a standard deviation, like length of investment. This tells you how an asset's history compares against the norm or average. With stocks, for example, you'll see that prices fluctuate more dramatically in the short-term, but their volatility falls the longer you maintain your portfolio.
2. Determine Correlation
One key to effective diversification is to combine asset classes that don't move in lockstep with each other. So, when one asset or market segment declines in value, the loss may be offset by other assets in your portfolio that are gaining in value. As an example, when long-term bonds zig, foreign shares often zag. By combining asset classes with low correlations, you'll reduce your portfolio's overall volatility and earn more consistent returns each year. The result: You improve the probability that you will build more wealth over time.
3. Decide which asset classes to include in your portfolio
The more asset classes you include when building an efficient portfolio, the more opportunities you'll have to enhance performance without taking on more risk. This means that you should consider multiple asset classes such as shares of large and small firms in the US and foreign markets, fixed-income securities, and cash. Also look to diversify among investment styles, such as value and growth, which often move independently of each other and further enhance diversification.
4. Use optimization to generate an efficient portfolio
Optimization software will calculate the combinations of asset classes that constitute an efficient portfolio or frontier. By looking at all the variables - return, risk, correlation, future performance estimates and percentage breakdown of your total portfolio - you can select the best combination of asset classes for your goals.
5. Use strategic asset allocation, tactical asset allocation, or both to develop your portfolio mix.
Strategic asset allocation sets an ideal target mix of assets that stay generally consistent over time. Adjustments are usually made only at predetermined calendar dates. On the other hand, tactical allocation focuses on being opportunistic and taking advantage of changing market conditions whether buying perceived opportunity or selling perceived risk.
Step 3. Bring A Portfolio Strategist On Board
Portfolio strategists take responsibility for three of the most important factors that affect your portfolio's performance: selecting asset classes, determining and maintaining target-asset mixes, and selecting and monitoring investment managers. Strategists are highly qualified to handle such tasks because of their global research capabilities, focus on asset allocation, and teams of experienced investors and academics who make up their investment policy committees. "By having systems in place to develop efficient portfolios, strategists can reduce portfolio volatility and deliver more consistent returns for investors from year to year." 1
Step 4. Implement your plan
Before You Implement Your Plan Make Sure Of These 3 Important Things:
Your investable resources
How much money do you have to invest? The answer is important because you need to make sure that the investments you choose allow you to gain access to all the asset classes you need to build an efficient portfolio. If your investable assets total $1 Million or less, we recommend that you consider no-load mutual funds or exchange-traded funds (ETFs), which generally offer the benefits of low minimums, low cost, and effective diversification. If you have greater sums to invest, you might consider privately managed accounts, which offer additional benefits such as customization, trading flexibility, and greater tax efficiency.
Your investment approach: passive or active
A passive investment approach is best if your goal is to match the performance of the overall market or a specific index. To implement this approach, we recommend index mutual funds and Exchange Traded Funds (ETFs), which track a variety of market indices. If, however you believe that it's possible to add value and out-perform the market through active security selection, you'll want to consider actively managed mutual funds and other investments that emphasize and de-emphasize various asset classes and market segments based on the mangers' outlook.
The quality of the manager
You need to assess the manager's track record to ensure they are capable of delivering strong performance and maintaining a consistent investment style. Avoid the mistake of relying on star ratings and past performance data, especially over short periods, to size up a manager. Study upon study proves that these methods won't help you to identify managers who can help you succeed. Instead, use the process that examines:
- A firm's investment process and overall stability
- The experience of the managers and analysts
- Their understanding of risk when building portfolios,
- The "hard numbers" such as the information ratio
This will help you to determine if a manager is skilled or just lucky.
Step 5. Rebalance Regularly
Taking a strategic approach to asset allocation, you or your portfolio strategist will want to rebalance your portfolio back to its intended target mix every quarter. What that means is you reduce overall risk by consistently and methodically buying low and selling high, which helps keep your plan on track and enhances your wealth by avoiding the pitfalls of investing with your emotions. If you favor a tactical asset allocation strategy, you or your strategist will keep an even closer eye on the financial markets and rebalance based on opportunity among various asset classes and market segments rather than calendar dates.
Step 6. Track Your Progress
Every quarter you should take the time to revisit the goals and strategies you set out with at the beginning of your journey toward financial success. Are you still on track? Do any changes need to be made to reflect new developments? Regular progress reporting will help you answer crucial questions about your plan.
Register for our workshop to learn more about the differences between strategic and tactical investing and how you can take advantage of the market.
1. The Art of Investing and Portfolio Management; 2nd edition; Cordes/O'Toole/Steiny; McGraw Hill, 2008; pg. 69.
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