Investment Articles

American investors lost trillions of dollars as a result of the bear markets of 2000-2002 and 2008. As a result of such losses, mutual funds companies are beginning to offer so-called absolute return mutual funds. The goal of an absolute returns strategy is to achieve, positive, more consistent returns under all market conditions. While the power of consistent returns has long been recognized, investors should be aware that the new absolute return funds often use different approaches in trying to achieve such results, some more questionable than others.

The focus on absolute returns has been long overdue. While many investors and investment advisers focus primarily on returns, smart investors realize that the true secret to successful investing is managing investment risk. Legendary investor Benjamin Graham first advanced this concept decades ago. Investors would be well advised to read Charles Ellis’ classic, “Investment Policy-Winning the Loser’s Game” (the more recent edition simply goes under the title of “Winning the Loser’s Game”) for a simple explanation of the concept. Simply put, the concept of absolute returns simply follows the Wall Street axiom of “don’t tell how much you made, tell how much you were able to keep.”

Many investors lost money in the recent bear markets because they adopted the popular static buy-and-hold approach to investing. But the recent bear markets offered further proof that the buy-and-hold approach is fatally flawed in that it fails to recognize the cyclical nature of the stock market. What most investors do not realize is that the buy-and-hold approach is based largely on a famous study known as the BHB report and a misrepresentation of the study’s findings.

Some financial advisors will mislead investors and tell them that there is no reason to make adjustments in one’s portfolio since the BHB study found that asset allocation, not individual investments, accounted for 93.6% of investment returns. What the BHB study actually found was that asset allocation accounted for 93.6% of the variability of investment returns, not the returns themselves,

Looking at only three types of investments, stocks, bonds and cash, the BHB study concluded that the variability of a portfolio’s investment returns increased as more money was allocated to the more volatile investments. In retrospect, this seems to simply be common sense. The key takeaway for investors is that the BHB study, however, did not study the determinants of actual investment returns, did not claim to do so, and made no representations regarding same.

Advocates of the buy-and-hold approach to investing often offer numbers regarding the cost of missing the “best” days of the stock market. As a trial attorney, I am always interested in the other side of the story, what is not being said. In this case, what is not being said is that recent research indicates that the benefits of avoiding the “worst” days of the market far outweigh the cost of missing the “best” days of the market.

A recent study by Javier Estrada of the IESE Business School found that missing the “best” 10, 20 and 100 days of the stock market (defined as the Dow Jones Industrial Average) during the period 1990-2006 reduced an investor’s returns by 38%, 56.8%% and 93.8%, respectively. On the other hand, Estrada found that avoiding the “worst” 10, 20 and 100 days of the stock market improved an investor’s returns by 70.1%, 140.6% and 1,691%, respectively. The study found similar results for the period 1900-2006. The difference in the numbers is due in large part to the fact that investors have to earn more, sometimes significantly more, than they lost just to break even and the time spent in making up for such losses constitutes an opportunity cost for an investor.

So what does this mean for investors? Does this mean that investors should engage in short-term market timing to avoid market corrections? Not at all, as trying to time the short-term swings in the stock market would be both costly and virtually impossible.

Absolute return investing simply acknowledges the cyclical nature of the market and then takes advantage of such nature to maximize potential performance. Those familiar with the classic book,”The Art of War,” will recognize this strategy of using the nature of things to one’s advantage as a cornerstone of General SunTzu’s strategies, but it is equally applicable to investing.

The truth is that most investment portfolios fail to take advantage of the nature of the market, as they contain too many investments with a high correlation of returns, meaning that the investments react in like manner to market conditions and therefore fail to provide an investor with adequate protection against downside risk. A 2007 study by Schwab Institutional reported that 75% of investor portfolios studied were inappropriate for the investor in light of the investor’s goals and/or financial situation. This unfortunate situation is often due to the shortcomings of the commercial asset allocation/portfolio optimization software often used by financial planners and investment advisers.

Fortunately, investors wishing to implement an absolute returns strategy can do so on their own and save the costs and expenses involved with mutual funds. There are a number of investment products currently on the market that can greatly simplify the process of constructing an absolute returns portfolio. By heeding the advice of General Tzu and focusing on investment alternatives that have varying levels of correlation of returns and monitoring the stock market to decide when portfolio reallocation or substitutions may be appropriate, an investor can effectively manage investment risk and improve their potential for investment success.

James W, Watkins, III is an attorney, a CFP professional and an Accredited Wealth Management Adviser. His areas of expertise include wealth preservation, wealth protection and fiduciary law. He is CEO of InvestSense, LLC, a registered investment adviser firm located in Atlanta, Georgia. For additional articles and information, visit http://www.investsense.com. Mr. Watkins can be contacted at tawj3@yahoo.com.

INVESTMENT STRATEGY

A sound investment strategy may not mean what you think it means. Forget about all the hype you hear from day traders, Forex traders, and all the other noise out there. In fact a sound strategy is actually quite boring. Let me explain.

In order to have a sound strategy you MUST know what you want to accomplish, and what your time frame is. Think if it as a road map. You must know where you are going and when you have arrived. The best strategy is the one that will get you there with the least risks. We manage these risks with a proper asset mix.

By asset mix we mean stocks, large cap, mid cap, small cap, value, growth, domestic, international, global. This can be quite confusing for the novice, but I will explain all this in future writing. We also mean bonds, bonds range in rating from triple A, the safest to Junk, the riskiest. A combination of these can have a place in most any portfolio. Cash is another part of the asset mix. Cash ranges from savings accounts, to CDs, to money markets. Real estate is also an asset that can be combined into the asset mix. My sixteen years of experience in the investment industry shows no advantage in risk reduction or performance increases, so I neither advocate, no include real estate in any of my portfolios.

Time horizons are generally divided into three segments: long, medium, & short. Long horizons are generally 20-25 years or longer. Medium time frames generally range from 5-20 years. Short time frames are usually shorter than five years. Notice I use the term generally to define time frames. This is because based on where you are in life, your goals, and a term I am about to introduce risk tolerance, can have a little bit of effect on how your time frame is measures. Also a good investment strategy is part art, part science.

Risk tolerance is just what it says. What is your tolerance for risk? And another question that doesn’t get asked often enough what is risk? To define risk tolerance we must first define the different types of risks and how they can affect our investment. There are more types of risk than what I am going to cover in this article; it’s more technical than is necessary for our purposes.

The risk that we are all familiar with is loss of principal. In other words, we lose the money we’ve already invested. Most of us are familiar with this after the recent market crash. The second type of risk I want to cover is return risk. Will our strategy offer enough return to meet our goals. The third risk I want to cover is volatility risk. This is the one that gets us in trouble. This is what makes us buy high and sell low. This is where most people make their mistakes.

We use an asset allocation model along with our investment policy to manage our risks and get the greatest return for the least amount of risk. Think of it as a pie chart that tells what types of investments we need and how much of each we need. As long as our goals don’t change, we only need to buy and sell to keep our portfolio balanced.

The investment policy tells us how often we will rebalance the portfolio. It tells us when we will re-evaluate or portfolio to see if our investments still meet our original objectives. It tells us when to buy, sell, and take any cash out of your portfolio.

This article is just an outline, if you will, of a proper investment strategy. As I build this site we will examine the essential elements, time frame, goals, and risk tolerance to learn how you build a successful portfolio that will meet you investment needs. Feel free to read our other article and visit the other pages on this site to learn how to manage your investment strategy.

Matt Mullis
http://einvestmentstrategy.com

Some investors believed that from the period of 1982-2000 it was their “right” to earn 10% every single year in their investment portfolios without any identifiable risk. After the 2001-2003 bear market that mentality returned. People have short memories and suffered again in the period of October 2007-March 2009. Risk showed up at our doorstep and caught everyone by surprise. Warren Buffett, George Bush and many others were on that list. Everyone is concerned about risk now. The question in the era of “the new normal” is to how to invest wisely taking risk into regard.

Asset Allocation: Everyone has heard about it but who practices it? A strict model forces one to by when everyone is selling and sell when everyone is buying. Once or twice a year at the most is the time frame to review a portfolio. A change in one’s life, be it personal, emotional, or financial are valid reasons to adjust the portfolio. But it is not enough to blindly follow a rigid formula. We incorporate our macro views to identify the markets that call for the highest concentration (and likewise the lowest). The same can be said for the fixed income world, which comes in many different flavors.

An Investment Policy Statement is essential in addressing an Asset Allocation Program. That is because we will have the information to help clients allocate to strategies that address our three legged stool of successful investing, need for capital appreciation, risk tolerance level, and liquidity issues. A lack of such a policy can take a client in a direction that he/she may dispute in the future. Whether he/she should have a conservative, moderate, or aggressive portfolio, all parties concerned should be in agreement at the beginning and throughout the relationship.

Listed Options: Options can be used to increase income with a number of strategies. One such strategy is the “collar”. The motivation behind this strategy can be for one of two reasons. The first is to take a limited risk with limited upside potential on a stock that you wish to buy. The second reason is to manage a position that may be very large for your portfolio or one that carries a very low cost basis that hopefully can avoid being sold.

Let’s take a look at a sample trade. IBM currently is trading at $155.00. One can sell a February 155 call that will expire in 30 days for a price of $2.50. The downside protection is to purchase a February 150 put for $1.25. At expiration if the stock closes at 155 or above the investor will be “exercised” and out of the position at $156.25. I took the $1.25 credit that came from the two option transactions and added that number to $155. This equates to a 10% annualized return. On the downside the the “break even” point is $153.75. The risk is limited to $150.00. Ideally the risk should equal reward, but this example is just for illustrative purposes.

Due to the current bear market many investors are underfunded. Institutional and individual investors need to squeeze everything they can out of their portfolios to make up for poor performance, but must be vigilant about not taking on to much risk. Asset Allocation, an Investment Policy Statement and suitable options strategies are the cornerstone for providing the potential for a positive investment and risk management future.

Daniel B. Stern has been an active member of the Chicago Board of Trade since 1975 along with being a ’seat holder’ at the Chicago Board Options Exchange from 1988-2009. He is founder and head of Stern Investment Advisors, LLC, a financial investment firm company based in Chicago. His experience as a futures trader and options trader, (along with investing his own funds and managing money for his clients) has given him the necessary background to provide clients with the tools to succeed with their financial goals.

Most Middle Eastern countries in the Persian Gulf and around the Mediterranean have signed Bilateral Investment Treaties (BITs) with European countries, in particular, Austria, Belgium, France, Germany, Italy and, to a lesser extent, Spain and the United Kingdom. These treaties aim to protect foreign investments from arbitrary expropriation and provide for dispute settlement procedures if these are required. Dispute settlement can involve the two signatory states only, but also empower private companies to have recourse to investor-to-state international legal arbitration. The future of the EU’s BITs, however, is currently being redefined in Brussels, the capital of the European Union. Indeed, the new Lisbon Treaty that has organized the European Union (EU) since December 2009 now gives the authorities in Brussels exclusive rights to negotiate international deals on foreign direct investment (FDI). What does this mean for the Middle East?

First, some background. Although the EU is a single customs territory with exclusive rights to negotiate and sign international trade agreements, be it World Trade Organization (WTO) deals or bilateral free trade agreements (FTAs), the right to sign treaties regulating foreign investment with third countries has traditionally been jealously guarded by member states. These states have pursued their own policies to suit their individual economic strategies or to maintain privileged relationships with powerful partners. But times have changed. With the rise of challenging economic powers such as China or Russia and other crucial emerging markets, Europeans have felt the need to pool power to convince their partners to open their markets for investment and to ensure their assets are adequately protected. For outsiders too, it will become easier to deal with one single partner on FDI, especially in the services sector, rather than navigate 27 different entities that are supposed to be one single market but are often a patchwork of diverging regulations.

The drafters of the Lisbon Treaty meant to allow the EU not only to sign investment liberalization deals, but also so-called “post-establishment” agreements regarding protection of investments, which is what BITs do. The EU’s 27 member states have signed about 1,700 BITs, of which around 1450 are in force. Under the new treaty, it is likely that the process leading to a future BIT will operate like the 2007 US-EU Open Skies agreement. Here, the EU agreement replaced and superseded all other bilateral agreements on flight rights signed between individual member states and the United States. But before the Brussels machinery comes up with its own BIT, the first major challenge is to clarify the legal status of all the existing BITs. For both practical and political reasons, these cannot just be brushed aside in one stroke.

The EU Commission, the body that negotiates trade deals, is drafting a proposal on how to “grandfather” all these agreements, i.e. to integrate member state BITs into EU law. But this arrangement might require adjustments to certain treaties. Furthermore, the political process surrounding grandfathering will not be as straightforward as some might have hoped.

The Commission is likely to put conditions on treating certain BITs as compatible with EU law. In previous legal battles with Austria, Sweden and Finland, the Commission has used the European Court of Justice’s opinions to make these countries change BIT clauses or abandon BITs that allowed unlimited transfer of profits across borders. Under EU law, special circumstances, such as a balance-of-payments crisis or financial sanctions against a third country, should permit restrictions on profit transfers. The Commission might dig out more clauses to make a point about compatibility with EU law. Some member states will be reluctant to let their external FDI policies be determined by Brussels and are likely to pick a fight. Some experts predict that the parties to the process might resort to the European Court of Justice to clarify Brussels versus the member states’ powers on the matter.

Now enter the EU Parliament. Since December last year, it has equal powers to the Council of member states to decide on trade and investment policy. Certain Members of the European Parliament (MEPs), mostly on the left side of the political spectrum, have already signaled that they will want to put conditions on grandfathering BITs. Not all member state BITs cater for investor-to-state arbitration proceedings, but a growing number do. For ideological reasons, some MEPs oppose the principle of investor-to-state dispute settlement, so the matter might become politicized. Certain MEPs will insist on conditioning grandfathering on the introduction of environmental, ethical or labor clauses.

Given the still very patchy power configuration among the different institutions under the new treaty, it is unclear how this “Battle of the BITs” will ultimately play out. So: What are the implications of this centralization of European investor protection policies for Middle Eastern policy-makers? From a Middle Eastern perspective, this will have both up and downsides. On the one hand, the EU might in the future be much more demanding on its partners as to the degree of protection of its investments. If investor protection, and even procedures for investor-to-state dispute settlement, is included in future bilateral free trade agreements, the EU will be able to condition better access to its markets on strong commitments by its partners to sign up to these clauses. On the other hand, as many Middle Eastern countries have become major international investors, it will be much easier for them to have their own investments guaranteed. There are very few Middle Eastern BITs with the new EU member states, for example, where there is substantial need for foreign investment, but where the business environment tends to be less favorable than in an average Western European economy, and therefore investments not always as secure. It might well be in the interest of Middle Eastern investors to have only one interlocutor-the authorities in Brussels-to deal with FDI matters in the 27 member states.

But all this will take time. We are still quite far from a model “EU BIT,” as some have been predicting, or an equivalent of the NAFTA Chapter 11 and its bilateral investor-state dispute settlement mechanism, integrated into the next EU bilateral trade deal. The EU will move slowly. 2010, at least, will be a year of legal clarification. Furthermore, it must also be clear that these new powers of the EU do not extend to portfolio investment. Financial services in the EU are not fully integrated and regulation is not centralized-even if the EU has attempted to provide a framework. Therefore, Sovereign Wealth Funds and private funds from the Middle East will need to continue to deal with individual member states to see to it that their interests are protected.

First published: Friday 23 April 2010

http://www.majalla.com/en/economics/article46587.ece

The Trustee Act 2000 makes it clear that trustees are required to obtain and consider investment advice from a person they consider qualified to give it. This makes a great deal of sense but how does it work in practice?

The first job of the Investment Adviser is to help the trustees to prepare an Investment Policy Statement. This statement is intended to clearly identify what the proposed investment is required to achieve, over what time period, and how performance will be assessed in the future. A typical Investment Policy Statement will include the following:-

The overall level of return expected and minimum yield required
The income or capital requirements
The nature of timing of any liabilities
The liquidity requirement, including dates of planned expenditure
The marketability of the investments – important if income needs to be raised quickly
The time horizon of the trust – less than five years or long term
The time horizon over which performance will be assessed
The residence and tax status of the trust and the beneficiaries
Any socially responsible investment constraints
Other tax and legal constraints

Once agreed with the trustees, the statement will help the adviser in devising a strategy to generate a sufficient return to fulfill these objectives over the short, medium and long term.

Investment Risk

In an ideal world, trustees would expect a competitive and rising income with no risk to capital. In the real world however, interest from deposit accounts will not even match inflation. This means that the assets of very many trusts are guaranteed to go down in real terms. To protect trust assets against inflation and/or to generate a reasonable income in the current climate, some investment risk has to be accepted. Whilst cash that will be needed in the next year or two will have to be kept on deposit, money not earmarked for short term expenditure should be invested in a professionally designed portfolio of assets such as equities, gilts, corporate bonds and commercial property. The investment adviser will be able to suggest a portfolio to fulfill the objectives within the Investment Policy Statement and to explain the risks involved. It is for the trustees to decide if that level of risk is acceptable or whether the stated growth or income requirements were over optimistic. A degree of compromise is often required before an investment portfolio is finally agreed upon.

Investment Management

The size of the required investment largely dictates how the portfolio will be managed. This is because a major factor in reducing investment risk is diversification. As an example, investing in a portfolio of 40 or 50 shares carries much less risk than investing in just one or two. This means that smaller amounts might be directed towards collective investment such as unit trusts or investment trusts which can provide the required spread. There is often a combination of the two approaches with UK investments being directly held and foreign investments being in collectives. This is because the UK portion of a portfolio is invariable larger than the amount invested in (say) the USA or Europe.

Designing a suitable portfolio is only the start of the process. As different assets grow at different rates, the risk profile will move away from where it was originally set. For example, a typical portfolio might be invested 40% in equities with the balance in cash and fixed interest securities. If stock markets have a good year, the equity content might grow to 50% or more and the risk profile will have increased. A process needs to be established to regularly monitor and adjust the risk profile of the portfolio. The day to day management of larger portfolios, including rebalancing to maintain the original risk profile, is often passed to a discretionary fund management company. The role of the nominated Investment Adviser then becomes one of helping the trustees to evaluate the performance of the Investment Manager against the benchmarks agreed in the Investment Policy Statement as required by the Trustee Act 2000.

Independent Advice

To obtain impartial advice on the entire investment market, trustees should deal with an Independent Financial Adviser. There will than be no concerns about their recommendations being tainted because of access to a limited range of products or funds. Similarly, an Independent Financial Adviser will have no compunction about replacing an under-performing fund manager in the future – whereas an adviser working for the same company might not be in a position to do so.

Mike Wilson is a director of Scottsdale Consulting Ltd, having entered Financial Services in 1985 he specialises in pensions and investments, as well as expat services. He has a wealth of experience advising clients and in training other financial advisers.

Yes, you CAN invest small money like $100 in some very good investments in 2011 and in the future under certain circumstances. In fact there are good investments offered by some of the best fund companies that were designed originally for the small investor. Here’s how to invest in them.

Whether you invest $100 or $100,000 in 2011 or later, you will need to first open an account. This means that the party you invest money with will incur expenses to open and service your account. Hence, even the best fund companies have a minimum investment policy. A one-time investment of $100 is not attractive or practical for them. However, $100 or MORE a month on an automatic investment plan is another story. I suggest you invest your money in the bank until you have a few thousand in cash reserves. Then, when you can afford $200 or $300 a month… here’s how to invest in an assortment of good investments called mutual funds.

Do not feel intimidated by the fact that you can only invest small amounts of money and/or you don’t know a lot about where or how to invest. If you start to invest money in 2011 in solid good investments and continue on a monthly basis you’re on your way to a better financial future. That’s why some of the biggest and best fund companies cater to small investors with an AUTOMATIC INVESTMENT PLAN. Over time small investors can accumulate a substantial sum of money in an IRA account, for example. And the more money you have invested, the more money fund companies make.

You can find some of the lowest cost and best fund companies by searching “no-load funds” on the internet. See what they offer and what their minimum investment is for an automatic investment plan (monthly investments). Then call them up toll-free with any questions you have and ask for a starter kit and info on the funds they offer. I consider the following to be among the biggest and best fund companies: Vanguard, T Rowe Price, Fidelity, and American Century. You can invest money in good investments called mutual funds without paying sales charges or “loads” in any of their no-load funds.

Normally, when you invest by the month fund companies have you fill out a form so they can take money directly out of your bank account. These plans are not contractual with the best fund companies, so you should be able to stop the withdrawals or cash in at will. Now let’s look at how to invest for 2011 and beyond if you want a diversified portfolio of good investments with only moderate risk. We’ll say you want to invest $100 a month into three different funds with the same fund company.

Invest with $100 going to a general money market fund, $100 to an intermediate-term bond fund, and $100 to a general diversified large-company stock fund. This gives you a balanced portfolio of money market securities, bonds and stocks. You’re then good to go with good investments in all three basic asset classes, and overall portfolio risk is only moderate. If you want a tax break when you invest money and accumulating money for retirement is your goal consider an IRA account… IF you qualify based on IRS regulations.

Otherwise, you can simply have an account in your name only or a joint account with your spouse like at the bank. Mutual funds are the original good investments designed for investors who want help managing their money. When you invest money in funds in 2011 and beyond you simply pick the funds and they do the rest. With the best fund companies your total cost to invest can amount to less than 1% a year! Look no further for good investments, year in and year out.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

For an intending entrepreneur, especially one who is planning to start his own business take off and grow, life insurance is a policy he may consider buying. The reason is that life insurance goes beyond the primary reason to protect ones dependent against the loss of your income or services, (death settlement); it also helps a person to plan for his future. Of course, life insurance has various products with savings and investment targets.

To many, insurance is about paying a regular premium to the insurance company in order to get compensation whenever a loss occurs. But aside from this, insurance could be a viable means of making money, especially through investment in some insurance products.

A key peculiarity of investment – linked insurance products is that they help the policy holder to save for the purpose of investment. Some other characteristics of such products include allowing the policy holder to get interest on his savings; giving him access to loan to financial counseling as well as compensation for his dependents, if he dies before the policy matures. An investment-focused insurance policy helps to cultivate a savings habit in person, while motivating him to focus on his set plans.

These policies are provided by life and composite insurance companies. As expected, they usually have different benefits attached to them.

However, it is advisable, any individual, who wants to achieve a target (which could be an investment plan or a project), to get a flexible investment plan policy. A flexible investment plan is a long-term investment plan policy (of 10 years span, for instance), but with highly competitive guaranteed compound interest rates. The policy also includes a sizable guaranteed death benefit and is available to anyone under the of 55.

I noted that the product provides for the payment of additional contributions at any time within the policy term. At maturity, the policy owner can be allowed an option of extending the policy contract, if he wants.

Interestingly, the insurance company will support the dependants of policy owner with sizable, in-built life coverage, if he dies within the early years of the policy.

By this, the investment policy is well structured to protect the living and alleviate the suffering of the dependents of the dead. Besides, the policy can be pledged as collateral security to raise a loan.

The best way to analyze the amount of life insurance you want is to take the following three steps:

Compute the financial need

List the everyday expenditure that will have to be covered by your loved ones once you die. Think about the one time operating cost that occurs immediately ahead of and after a death. The major monetary cost of your premature death is the loss of your income. How many years did you plan to support your loved ones? How much will everyday expenditure decrease because you are no longer there work out the capital available to meet those needs If you have considerable savings or other assets, you may choose to plan on using these funds to cover part of the monetary need. Subtract these resources from the financial need calculated above to determine how much life insurance you should purchase. Now that you’ve recognized the monetary need that will exist on your death and the resources available, you can shut the gap among the two with life insurance. Shop around and compare prices and coverage’s carefully.

It’s significant to appraisal your need for life insurance periodically as your position change. Having another child or buying a new home could prompt a need to buy more life insurance. For more update visit http://thelucrativesearch.blogspot.com/2010/10/improve-your-investment-profile-with.html

Choosing an asset allocation, or the mix of stocks, bonds and cash in a portfolio, is the most important decision that you’ll face as an investor. A study by Ibbotson Associates concluded that asset allocation decisions determine about 100 percent of investment performance for those who follow a low-cost, long-term investing strategy. Similarly, according to a Dalbar and Associates study, many investors underperform the market because they deviate from their asset allocation plan during market downturns. Investors who want to maximize their long-term investment returns must develop a risk-appropriate asset allocation plan that they can stick with in good times and bad.

Asset Allocation Step 1: Evaluate Your Risk Profile

A reliable, long-term asset allocation plan starts with a thorough understanding of your risk profile. It’s helpful to think of your risk profile in two parts: your risk capacity, or the degree of portfolio volatility that you can absorb financially, and your risk attitude, or your emotional tolerance for risk.

Risk capacity is influenced by factors like income and net worth, but its largest determinant is time horizon. Early in life, when retirement is far off, your future earning potential can be thought of as a sizable bond, allowing you to allocate the majority of your retirement portfolio to more volatile equity investments. As you grow older and your future earning potential decreases, it’s important to replace those bond-like expected earnings with a higher percentage of bonds in your portfolio. By the time you retire, most of your investments should be in bonds in order to provide a reliable, low-volatility source of income.

Risk attitude is more difficult to quantify than risk capacity, especially for first-time investors who haven’t experienced difficult market conditions. Many investors make the mistake of failing to understand their risk attitude until a market downturn occurs. This usually leads to selling equity investments at the worst time (the bottom of the market), only to miss out on a subsequent market rebound. To help avoid this phenomenon, investors can use resources like risk questionnaires and historical performance charts to help find a stock/bond mix with an emotionally acceptable level of volatility. These tools are far from perfect, however, so when in doubt, it’s best to err on the side of conservatism.

Generally speaking, your most conservative risk dimension (capacity or attitude) should determine your portfolio’s equity/bond split. For example, if you have the risk capacity to handle a portfolio of 80% equities, but can only stomach the volatility of a 70% equity portfolio, you should choose the more conservative allocation. Developing a plan that you can stick with in good times and bad is much more important than maximizing your expected return.

Asset Allocation Step 2: Break Down Equities and Bonds

Once you’ve settled on a risk-appropriate stock/bond mix, you can think about subdividing the equity and fixed income portions of your portfolio. The key to this part of the asset allocation process is finding a suitable tradeoff between simplicity and maximum expected return.

Modern Portfolio Theory tells us that by adding volatile asset classes that don’t move in lockstep with the rest of our investments, we can increase our portfolio’s risk-adjusted return. Based on that principle, consider adding international stocks and Real Estate Investment Trusts (REITs) to your equity portfolio. Companies outside of the US represent more than half of the value of global equity markets, and investors have historically been compensated for the risks that accompany international investing. Likewise, REITs offer a great diversification benefit and give investors unique exposure to the commercial real estate market.

Within your US and international stock allocation, you may also want to boost your exposure to small company and value investments, as investors have historically been compensated for the risks inherent in these investing styles. If you’re not familiar with the arguments for overweighting these equity segments, however, you should probably steer clear of them in favor of simplicity.

To expand your fixed income allocation beyond a broad sampling of the US Bond Market, consider adding Treasury Inflation-Protected Securities (TIPS) and municipal bonds. TIPS are unique because, unlike traditional bonds, their principal and interest payments adjust with inflation, so they offer a government-guaranteed rate of return above inflation when held to maturity. Municipal bonds are appropriate for investors in high tax brackets with taxable investment accounts, as the interest from these bonds is generally tax-exempt in the issuing state and at the federal level.

Portfolios can be sliced and diced in any number of ways, but a more complex portfolio is not necessarily a better one. Wise investors understand that their investing success will largely be determined by their ability to stick with their asset allocation plan, and for that reason, they err on the side of simplicity.

Asset Allocation Step 3: Implement Your Plan

Once you’ve broken down your portfolio into target percentages, all that remains is to implement your asset allocation plan. With literally thousands of funds to choose from, it’s best to narrow down the field by focusing on one factor that you can control: investing costs.

First, you can minimize the impact of many fees, expenses and taxes by investing in low-cost index funds and ETFs. If your workplace retirement account has limited choices, simply pick the lowest cost funds that fill a position in your asset allocation plan. Secondly, pay close attention to all applicable fees and commissions prior to doing business with a brokerage firm or mutual fund company. IRAs and other investment accounts are extremely portable, so there’s no good reason to stick with a high-commission broker. Finally, maximize your portfolio’s after-tax returns by placing tax-inefficient asset classes (e.g., REITs, Bonds) in tax-sheltered accounts.

Once you’ve settled on specific investment choices, help yourself stay on track by formally documenting your asset allocation plan in an Investment Policy Statement (IPS). This document provides an organized framework for recording your investing goals, philosophy and target allocation so that you can help yourself resist the temptation to stray from your long-term strategy. The ideal time to draft an IPS is while the rationale for your asset allocation decision is fresh in your mind.

Conclusion

More than any other factor, your ability to develop and implement a risk-appropriate asset allocation plan will determine your investing success. By thoroughly evaluating your investing risk profile, choosing an appropriate level of portfolio complexity, and picking low-cost investments, you’ve taken a giant step toward your long-term investment goals.

George Watkins is President of West Wind Wealth Management, an independent, SEC-registered investment advisory firm that specializes in index fund and ETF portfolios. A former nuclear-trained Naval Officer, George has a BS in Economics from Duke University and an MBA from Harvard Business School. To receive a free asset allocation recommendation or a personalized portfolio recommendation for as little as $19, visit http://www.invest-it-yourself.com.

Choosing an asset allocation, or the mix of stocks, bonds and cash in a portfolio, is the most important decision that you’ll face as an investor. A study by Ibbotson Associates concluded that asset allocation decisions determine about 100 percent of investment performance for those who follow a low-cost, long-term investing strategy. Similarly, according to a Dalbar and Associates study, many investors underperform the market because they deviate from their asset allocation plan during market downturns. Investors who want to maximize their long-term investment returns must develop a risk-appropriate asset allocation plan that they can stick with in good times and bad.

Asset Allocation Step 1: Evaluate Your Risk Profile

A reliable, long-term asset allocation plan starts with a thorough understanding of your risk profile. It’s helpful to think of your risk profile in two parts: your risk capacity, or the degree of portfolio volatility that you can absorb financially, and your risk attitude, or your emotional tolerance for risk.

Risk capacity is influenced by factors like income and net worth, but its largest determinant is time horizon. Early in life, when retirement is far off, your future earning potential can be thought of as a sizable bond, allowing you to allocate the majority of your retirement portfolio to more volatile equity investments. As you grow older and your future earning potential decreases, it’s important to replace those bond-like expected earnings with a higher percentage of bonds in your portfolio. By the time you retire, most of your investments should be in bonds in order to provide a reliable, low-volatility source of income.

Risk attitude is more difficult to quantify than risk capacity, especially for first-time investors who haven’t experienced difficult market conditions. Many investors make the mistake of failing to understand their risk attitude until a market downturn occurs. This usually leads to selling equity investments at the worst time (the bottom of the market), only to miss out on a subsequent market rebound. To help avoid this phenomenon, investors can use resources like risk questionnaires and historical performance charts to help find a stock/bond mix with an emotionally acceptable level of volatility. These tools are far from perfect, however, so when in doubt, it’s best to err on the side of conservatism.

Generally speaking, your most conservative risk dimension (capacity or attitude) should determine your portfolio’s equity/bond split. For example, if you have the risk capacity to handle a portfolio of 80% equities, but can only stomach the volatility of a 70% equity portfolio, you should choose the more conservative allocation. Developing a plan that you can stick with in good times and bad is much more important than maximizing your expected return.

Asset Allocation Step 2: Break Down Equities and Bonds

Once you’ve settled on a risk-appropriate stock/bond mix, you can think about subdividing the equity and fixed income portions of your portfolio. The key to this part of the asset allocation process is finding a suitable tradeoff between simplicity and maximum expected return.

Modern Portfolio Theory tells us that by adding volatile asset classes that don’t move in lockstep with the rest of our investments, we can increase our portfolio’s risk-adjusted return. Based on that principle, consider adding international stocks and Real Estate Investment Trusts (REITs) to your equity portfolio. Companies outside of the US represent more than half of the value of global equity markets, and investors have historically been compensated for the risks that accompany international investing. Likewise, REITs offer a great diversification benefit and give investors unique exposure to the commercial real estate market.

Within your US and international stock allocation, you may also want to boost your exposure to small company and value investments, as investors have historically been compensated for the risks inherent in these investing styles. If you’re not familiar with the arguments for overweighting these equity segments, however, you should probably steer clear of them in favor of simplicity.

To expand your fixed income allocation beyond a broad sampling of the US Bond Market, consider adding Treasury Inflation-Protected Securities (TIPS) and municipal bonds. TIPS are unique because, unlike traditional bonds, their principal and interest payments adjust with inflation, so they offer a government-guaranteed rate of return above inflation when held to maturity. Municipal bonds are appropriate for investors in high tax brackets with taxable investment accounts, as the interest from these bonds is generally tax-exempt in the issuing state and at the federal level.

Portfolios can be sliced and diced in any number of ways, but a more complex portfolio is not necessarily a better one. Wise investors understand that their investing success will largely be determined by their ability to stick with their asset allocation plan, and for that reason, they err on the side of simplicity.

Asset Allocation Step 3: Implement Your Plan

Once you’ve broken down your portfolio into target percentages, all that remains is to implement your asset allocation plan. With literally thousands of funds to choose from, it’s best to narrow down the field by focusing on one factor that you can control: investing costs.

First, you can minimize the impact of many fees, expenses and taxes by investing in low-cost index funds and ETFs. If your workplace retirement account has limited choices, simply pick the lowest cost funds that fill a position in your asset allocation plan. Secondly, pay close attention to all applicable fees and commissions prior to doing business with a brokerage firm or mutual fund company. IRAs and other investment accounts are extremely portable, so there’s no good reason to stick with a high-commission broker. Finally, maximize your portfolio’s after-tax returns by placing tax-inefficient asset classes (e.g., REITs, Bonds) in tax-sheltered accounts.

Once you’ve settled on specific investment choices, help yourself stay on track by formally documenting your asset allocation plan in an Investment Policy Statement (IPS). This document provides an organized framework for recording your investing goals, philosophy and target allocation so that you can help yourself resist the temptation to stray from your long-term strategy. The ideal time to draft an IPS is while the rationale for your asset allocation decision is fresh in your mind.

Conclusion

More than any other factor, your ability to develop and implement a risk-appropriate asset allocation plan will determine your investing success. By thoroughly evaluating your investing risk profile, choosing an appropriate level of portfolio complexity, and picking low-cost investments, you’ve taken a giant step toward your long-term investment goals.

George Watkins is President of West Wind Wealth Management, an independent, SEC-registered investment advisory firm that specializes in index fund and ETF portfolios. A former nuclear-trained Naval Officer, George has a BS in Economics from Duke University and an MBA from Harvard Business School. To receive a free asset allocation recommendation or a personalized portfolio recommendation for as little as $19, visit http://www.invest-it-yourself.com.

In our “can’t wait”, “get it now” society, wouldn’t it be nice to learn how to get more from your investment assets. Wouldn’t you like to secure a financial future for you and your family, while worrying less and prospering in both up and down markets? Obviously, this is the American dream! However, it is an achievable dream. Here are seven investing secrets to help you achieve these elusive goals. You won’t hear these from your broker!

1. Markets move in cycles. Learn to recognize these cycles and the investment strategies that prosper in that cycle. Right now we are in a secular bear market. Expect a lot of volatility and little long-term market movement within a large trading range.

2. Buy and hold won’t work right now. The reason, see secret #1. You need an actively managed investment strategy to win in this environment.

3. Trend following works in all cycles, especially secular bear markets. Find an advisor or manager who can spot up or down trends and ride them to profits within this longer term trading range.

4. Mutual funds are dead! Exchange Traded Funds (ETFs) are the way to go. They are low cost, marginable, can be traded intraday, give broad diversity of holdings, allow for stop loss orders, cover just about any stock, bond or commodity market and put and call options can be purchased or sold against the ETF position.

5. Risk management is the key to survival. Make sure you or your advisor have a written plan on how to manage your assets. This plan should also be specific as to when positions are entered and when (and how) they should be exited to protect your capital. This plan should be more than the standard investment policy statement.

6. Stay away from CNBC. This is the surest way to poor investment decisions is to get caught up in the 24 hype this channel must produce to keep an audience. If you must watch this channel, do so only during non-market hours.

7. Cut your losers short and let your winners ride. This is investing 101, but it is surprising how many people hold their losers and eagerly take profits on their winners. Let your winners ride as long as the trend is intact. Limit losses to no more than 6-8% of your position cost.

An author, registered investment advisor and Personal Financial Specialist, Jeff Diercks has helped high net worth and institutional investors grow their investment assets in both up and down markets for over a decade. Mr. Diercks is regularly featured in the mainstream media as a specialist in trend following investment strategies. Mr. Diercks’ firm, InTrust Advisors, has a multi-day mini-course that might help you achieve better investment results with your portfolio called “Seven Days to a Life Changing Investment Results.” This mini-course may be just what you need to get you motivated to secure your future today. You can sign up at http://www.intrustadvisors.com/investment-management-services/#sevendays.