First Dream, Then Focus

Add comment March 7th, 2008

  Amy L. Barrett, MBA, CFA, CFP®, CDFA™ 

Everyone with a few dollars in their pocket has a long-term investment plan whether they realize it or not.  The owner of the cash might choose to spend the money.  However, this action is far from the best strategy for long-term fiscal health.  On the other hand, if the cash turns into an investment with more return potential, a more solid plan exists than the “spend it all” plan.  By holding an investment, you have an investment plan.  Nevertheless, you must ask: “Is this investment plan right for me?”  In other words, “How will the investment grow so that I may reach my long-term goal?”  You may have inadvertently chosen an investment, and thus an investment plan, that cannot get you to where you want to go.  Many people pay little attention.  Thus, their dysfunctional investment plan leads them astray.  

Too often investors collect assets over the course of their life without considering what role the investments have in their portfolio or retirement plan.  The better plan of action is to first identify your investing goals, then collect the assets that can most likely get you there.  An investor must set investment goals.   

The process involves a bit of dreaming and a lot of planning.  In the first goal-setting step, you must identify your ideal lifestyle, far off in the future.  Allow yourself the luxury of creating a fantasy life.  The second goal-setting step is assigning a dollar figure to the long-term lifestyle so that the goal is measurable.  Once long-term investment goals are set and measurable, the third goal-setting task is to design an investment strategy with the best possibility of getting you there.  

If you are fortunate enough to have already accumulated enough money to easily meet or exceed your life dreams, your goal is wealth preservation.  The investment strategy could contain mostly fixed income assets (bonds) which serve to protect wealth and a small amount of equities that increase in value over time.  Unfortunately, most people do not already have enough so the goal is to have investment growth.  After you have your goal, you must have an investment strategy which includes good planning and decision-making, acceptable investment return/risk, proper asset location, and correct investment execution.  Just as a well-designed automobile can run for years, a well-structured investment strategy can deliver the desired results over time.   

Amy L. Barrett MBA, CFA, CFP®, CDFA™ is a financial advisor, specializing in investment and divorce planning issues, with Savant Capital Management, Inc., Rockford, IL  815-227-0300

What is Your Risk Tolerance?

Add comment March 5th, 2008

  Amy L. Barrett, MBA, CFA, CFP®, CDFA™

Once your investment goals are set, then you can select the stock-to-bond allocation.  Your selection of the percentage of stock in your portfolio is your most important investment decision.  The higher percentage of stocks produces a higher level of return and risk.  How can you know that a stock-to-bond ratio is too high or too low for you?  What is your investment risk tolerance? 

Although the process requires serious consideration, we have a tool to help.  Keep in mind that the Risk Tolerance Quiz that follows is only an estimate of your risk tolerance.  A skilled financial advisor can provide more guidance.  Read the questions below and circle the best answer that best represents your situation.  The column with the most circles is your likely risk tolerance.  Keep in mind that some people have legal, moral, location, or tax issues that affect their risk tolerance.  

After taking the Risk Tolerance Questionnaire, find the column with the most circles.  If most of the circles are in column (1), your portfolio should be conservative with a stock-to-bond ratio of 40% stocks and 60% bonds or 50% stocks and 50% bonds.  If you chose column (2), the optimal ratio could be 60% stocks and 40% bonds or 70% stocks and 30% bonds. Column (3) would lead to an 80% stocks and 20% bonds or 90% stocks and 10% bonds portfolio.  If you select the furthermost right column (4), you should be comfortable with a stock-to-bond ratio of 100% stocks and 0% bonds. Risk Tolerance Questionnaire - Find Your Investing Comfort Level

Amy L. Barrett MBA, CFA, CFP®, CDFA™ is a financial advisor, specializing in investment and divorce planning issues, with Savant Capital Management, Inc., Rockford, IL  815-227-0300

Active Managers in Difficult Markets

Add comment March 3rd, 2008

   Adam W. Larson, CFA^®

Active managers claim they add value during difficult markets by forecasting market events and then by timing the market’s decline or recovery.  They argue that “boring” indexed strategies do not have the flexibility to time the market, and therefore will inevitably under-perform.

If that was true, January 2008 was the perfect month for active managers to show off their skills.  As conditions in the domestic equity markets worsened, active managers should have been able to shine.  The table below shows that this was clearly not the case.  The average mutual fund failed to outperform its passive benchmark in January.  In fact, the average fund performed significantly worse for most asset classes.