by Gerald McAdoo

Let’s take a vacation!  Where should we go? What mode of transportation should we use? When should we leave and when should we return?  

When we think about taking a trip, we automatically ask these questions and we get a written itinerary as confirmation. If travel time came and we did not know the answers to these basic questions, most of us would not step foot off the front porch.  Yet when it comes to our financial future, we often take to the road without asking the right questions—and without a map.

A successful investment strategy is similar to planning a vacation. Long-term investment strategies are founded on a clear understanding of your objectives and specific written investment guidelines. Make it a successful trip.  Consider implementing an objective-setting/asset allocation plan.

Define your investment goals. We are all unique. Each of us has a different personal and professional management style, and different investment goals and objectives based on our own unique circumstances. Many of us have short-term goals to purchase a car, to make a down payment on a home, or to continue meeting the increasing everyday expenses. Others will have longer-term goals of retiring without worry, having an estate to leave behind, or developing a college education fund for their children and grandchildren. For most of us, our goals are a combination of short, medium range and longer-term investment goals.

Write your investment goals.  The most important thing you can do is list your goals and prioritize them. Which one is the most important to you? Which is second? Which is important enough that you would be willing to sacrifice a few of the others in order to obtain it? These can be very tough questions and it will be time consuming to prioritize them, but this exercise is the essential step and the foundation to your successful investment management plan.

Link your goals to your asset allocation.  Historically, asset allocation, or diversification, has been  linked to 91% of the variability of returns over an investment cycle.  This means that the asset mix is the biggest determinant of the portfolio’s return.

Asset allocation is the percentage amount of a portfolio invested in equities, bonds and cash.

Your asset allocation is key to your success. But, how should you match your prioritized goals with a specific asset allocation strategy? In general, if your goals are longer-term which require your portfolio to grow substantially, your portfolio will need a higher proportion of equities. Consequently, shorter-term goals requiring less appreciation and less risk will need a lower percentage of equities.

Invest over time.  For longer-term (five plus years) investing, remember something called “Investing Over Time.” Because of day-to-day market fluctuations, equities are riskier over the short-term. However, the more time that you can stay invested in equities, the greater chance of seeing a positive return. In fact, since 1925, large company stocks have increased by more than 1,000% --in spite of two stock-market crashes, two world wars and the Great Depression. (Source: Ibbotson Associates)

Creating a written statement of your objectives and investment guidelines will help you to feel comfortable with how your money is invested, know what to expect for a return, know how to measure your progress and know when you have reached your destination.  So start packing!

Copyright © 2005 Gerald B. McAdoo, II

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