Why Establishing an Investment Plan is Key to Success

ven though you know it’s a good idea, why bother? I’ll just log on to the internet, visit a few thousand investment websites and presto! I’m invested, ready to make my millions! Unfortunately, this approach is not advisable, even though many do adopt this approach. We’re all smart, right?? How hard can it be? Well the honest truth, as opposed to the dishonest truth, is investors must take the time to understand themselves, their goals, objectives, risk tolerance, limitations, etc. By making this self assessment, only then can you arrive at an asset allocation. Asset what??

No, this is not some sort of demented financial planning term designed to rid the world of evil. Asset allocation is the process of determining which asset classes are appropriate for your portfolio and in what percentages. They include stocks, bonds, real estate, alternative investments, etc. Ultimately, investors must decide how much risk they can tolerate and produce an appropriate allocation mix. Studies have shown that approximately 90% of the return achieved in a portfolio is due to asset allocation. Perform this step right and you’re on your way to being a successful investor. Skip this step and, beware, Mr. Market has a way of making you pay dearly.

Wow! You have a plan which includes an asset allocation and a solid framework to begin building your portfolio. Now all you need are securities to fill out the allocations. We advise using no-load mutual funds, with low expenses ratios and managers that have proven their worth as compared to their peer groups. As far as selecting the individual funds and deciding how much to allocate between domestic v. international, value v. growth, large v. small, etc., we’ll leave to another time.

But for now, rejoice! You have a plan. Go back to what you enjoy! Don’t fear the market, but rather, respect it, understand your limitations and avoid the urge to follow the crowd.

And please, if you don’t have the time, patience or desire, please seek a professional investment advisor. That means a fee-only manager, who has no products to sell, whose interests are aligned with yours. You’ll be glad you did.

Happy investing!

Russ Floyd, CFA
2008

For more information about the importance of establishing an investment plan, visit the following link: Investing Principle 1: A Blueprint for Success.