A comprehensive financial plan addresses the entirety of your situation: goal planning, cash flow management, estate planning, insurance planning, tax planning education planning, charitable giving planning, retirement planning and investment planning. That said, the investment planning portion of the process is where many individuals like to focus.
At F5 Financial planning, we believe that there are three keys to successful investment management:
- You need to be investing towards a goal.
- You need to recognize that the market is efficient and avoid the temptation to “out smart” the market.
- You need to implement and execute an investment strategy
Every individual’s situation is unique; and, accordingly, so is each investment strategy. However there are some basics that use in defining the investment strategy for all of our clients:
- The market is efficient and you cannot “outsmart” the market. Yes, we’re aware of Warren Buffet’s success. We’re also aware of what the research has shown. Actively managed mutual funds underperform passively managed mutual funds. For this reason we eschew the use of actively managed mutual funds.
- The biggest risk to investment performance is investor behavior. Yes, we’re stating up front that the biggest challenge in achieving a client’s investment goals is you. That shouldn’t come as a big surprise – if you have invested for any duration of time you have experienced the emotional highs and lows associated with the market movements. While we like to think of ourselves as rational, our emotions have a huge effect on our behavior. With that in mind, we make sure that we clearly define each client’s strategy and review it with them regularly. In so doing, we can greatly reduce the influence of emotions on decisions.
- Asset allocation is critical to an investor’s success. Yes, we know that if you had bought Microsoft way back in the 80’s you would be retired to the Caribbean. However, you didn’t and the probability that you can pick tomorrow’s winner is infinitesimally small. With that in mind, we advocate an investment strategy that includes the following major asset classes: large cap stocks, small cap stocks, international stocks, emerging market stocks, REITs, and bonds. We use a single mutual fund for each of these asset classes.
- The most successful investment strategies are elegantly simple. Yes, we know that there’s new supercomputer that some day trader is using to beat the market and generate 100% annual returns. Good for him. We prefer to use techniques that (i) have their foundation in academic and empirically based research and (ii) can be explained in a manner that either your Grandmother or your 14 year old son can comprehend.
Using the above as a starting point, we work with you to determine the amount of risk that is (i) necessary and (ii) tolerable to reach your goal. The “necessary” part of risk is important in light of the time and size elements associated with your goals – if you have a shorter term duration goal and a smaller starting point, more risk is likely necessary. Conversely, if you have a longer term duration goal and a larger starting point, less risk is likely necessary. Conversely, the “tolerable” part of risk is important in light of the “can you sleep at night” test. It is absolutely critical that any strategy we implement allows you to have financial peace of mind. Without this, a strategy will crumble and leave all parties unhappy.
If you’d like to read more about the specific tools and techniques that we use in the implementation of strategies, you can click here. Fair warning, this is where we start to get down in to the details!
Interested in Finding Out More?
We’d love to have the opportunity to hear about your situation. Send us an e-mail or give us a call to find out more about next steps