My father, one of the best stock investors I have ever known, used to frequently remind me of what he called the “7 P’s.” This is how it went: “Proper Prior Planning Prevents P_ _ _ Poor Performance.” You can probably guess the 5th P. He found a way to hit me with that every chance he had. It applied to school, sports, work, and all elsewhere performance mattered. It matters a lot with respect to investing. So, over the last 34 years as a professional investment advisor, I have developed a simple and effective process to a successful investment plan.
Charles Kettering, a legendary American inventor said, “I expect to spend the rest of my life in the future. That is my reason for planning.” As I noted inpart one, investment planning is a process. In part one, last month’s column, I elaborated on the first three steps of the six-step process: Learn About You (or know yourself if you’rea DIY’r), Set Investment Goals, and, Review Existing Assets. The remaining threesteps of the investment planning process are: Understanding Investment Selection and Allocation, Prudent Investment Decisions Making,and, last but not least, the ongoing step called Portfolio Monitoring.
Step 4:Understanding Investment Selection &Allocation
When considering investments, it is critical to thoroughly understand both the risks and rewards, and how to strategically use them to achieve your goals. Again, the process. The investment planning processoften involves an understanding of strategic investment concepts. Even a conservative investor seeking safety and income from high quality bonds is well advised to adopt effective bond portfolio management techniques. A laddered portfolio, for example, will minimize interest rate risk and maximize returns. There is a learning curve. Investment planning requires homework. I will never say it is easy—much like anything in life worthy of our time and money. Approach thetask as the steward of your estate while considering what is at stake. Once the concepts of the process are understood, then prudent investment selection can take place. That is the next step.
Step 5: Make Suitable Investments
As a Certified Financial Planner® and aCertified Portfolio Manager®, I rely on the blend of unique skill sets when working on Step 5 of the investment planning process. With the benefit of learning from the first three steps of the process, along with a careful analysis of a person’s current portfolio and an educational discussion of prudent alternatives; strategic, unemotional decisions are made. Two of my ten investment tenets are “Know Yourself” and “Go With What You Know.” I prescribe a healthy dose of both as they relate to this step of the investment planning process. “Invest-sense” is a term I use to imply the combination of intuitive common sense and a sound psychology necessary to enable an individual to be a successful investor. The simple awareness of what you trust, buy, use, and like can lead to a common-sense approach to investing. Only you know best your unique investment parameters and constraints. They will guide you in making the right investment choices.
Step 6: Monitor Your Plan
Indeed, in and of itself, the investment planning process is a never-ending process. At the very least, it involves as one step the ongoing monitoring efforts of the investments held. To ensure you meet your goals, the on-going monitoring process will be comprised of the three “E’s”: Evaluate, Educate and Exchange. Through consistent review of your account’s positions and performance you will determine if any reallocation is necessary. All changes are made pragmatically, not emotionally. I am often asked, “How is the market doing?” In response I like to ask perhaps a better question. That is, “How is your investment plan doing?” So long as your investment plan is on track, the investment markets matter less. Stocks, nor any other single investment class, should define our entire investment plan.
Throughout the investment planning process keep this investment tenet in mind: Every seasoned investor knows two hard-learned lessons about risk and returns: If you focus on risks, the returns will eventually come to you. If you focus on returns, the risks will eventually come to you. Strive to minimize the risk inherent in all investments before chasing returns.
Happy & Heathy Holiday Wishes to All!
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