Investment Articles

The question is how to invest money to make money. The answer is to invest money only after asking a few questions about investment basics. Here are the questions to ask, and how to invest money to avoid scams and bad deals in general.

How to invest money, rule #1, is that there is no such thing as a perfect investment. A perfect investment would have the following features: guaranteed safe, guaranteed to make money and lots of it, high liquidity, zero costs and expenses, big tax breaks, and easy to monitor… so you always know where you stand financially. All investments can be compared based on investment basics, but no honest proposition contains all of the above features.

A scam will generally IMPLY that safety and high profits are guaranteed. Your first question before you invest money: what are the specific guarantees for safety and investment returns? If the answer you get sounds confusing or misleading, you have no need to ask any more questions. Something is rotten in Denmark, since no investment offers high safety and high profits… except scams. Now, let’s move on to some other investment basics and questions to ask. Remember, a large part of knowing how to invest money involves knowing how to avoid bad investments or those that don’t fit your needs.

Ask about LIQUIDITY. How quickly and easily can you get your money back if you want to cash in? What will it cost you? This is a very honest question, and the answer you get should be straightforward. You’re out to invest money to make money; not to get stuck with a loser that will cost an arm and a leg to liquidate.

The COST OF INVESTING is another investment basic you need to ask about. Most investments involve charges and fees to buy, hold, and/or sell. Many times the details are in the fine print, so make sure to ask upfront. High investment costs can turn a winner into a loser. For example, a good simple fixed annuity will pay a competitive interest rate and will have no charge to invest or hold; and no charges to cash in after just a few years. The wrong annuity contract can cost you 3% or more a year in charges and fees, plus heavy charges if you cash out in the first few years.

Be real careful when an investment promises tax breaks. Ask questions first and get it in writing before you invest money. Then, run it by your tax professional if you have one. If you don’t, take a pass. Your goal is to invest money and make money in the process. Not to take a chance and wind up in trouble at tax time.

Our last area of concern in regard to how to invest money and investment basics I refer to as VISIBILITY, or the ability to monitor your investment. After you invest money, then what? Can you track the value of your investment so you know where you stand financially at all times? Will you receive statements each quarter and at the end of each year showing the value of your investment assets?

As a financial planner, some of the worst horror stories of new clients I interviewed were brought to light when I asked to see their records for the investments they held. Sometimes their records or statements were incomplete or otherwise questionable. Sometimes, these investors could find no records at all and didn’t know who to contact to find out the status of their investment. That’s a perfect example of how to invest… NOT.

Before you invest money, sort out the investment basics covered in this article to avoid scams and other major investment mistakes. Don’t be afraid to ask the questions presented here. If you are dealing with honest people, they will be glad to answer your questions. If not, look someplace else.

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.

If you are like most people on the planet, you covet your positive investment returns and are scared to death that you might give up those returns in this tough market climate. I believe this is why a majority of individual investors missed some or all of the recent stock market ascent off the March 2009 lows and 60%+ move higher.

I think this is why a November 2009 survey of high net worth investors by Investment News, showed that only a slim portion of the wealthy feel in control of their financial lives, an even smaller number (fewer than 9%) enjoy thinking about financial matters and only about a quarter feel successful in investing.

So what is the secret to feeling better about your investments and protecting your portfolio from Mr. Market’s bears? The answer is to have a plan to identify and hedge your portfolio when market conditions clearly show a change in market direction may be coming.

This is where trend following shines. Trend following strategies don’t try to predict market or stock movements, instead they capitalizes on the market’s movements wherever or whenever they occur. Trend followers respond to what is happening rather than anticipating what might happen.

The goal of the trend follower is to let a new trend develop and then invest with that trend. The trend follower then holds that position until there is a reversal. The smart trend follower does not invest at the exact bottom because he/she wants confirmation that a turn (reversal) has occurred. Likewise the trend follower will generally not sell at the exact top (which is more easily identified after the fact). They sell after a clearly identified change in trend (reversal). Therefore, the trend follower is able to capture the “meat” of the trend.

Another very important point is that the trend follower is indifferent as to whether the trend is going up or down to capture his/her return…as long as there is a trend they can make money.

So how can trend following be used to protect your portfolio from the bears? Simple, in your manager allocation include a trend following manager in your allocation. During times of sustained market distress, this manager’s positive returns in a bear environment will help to hedge or offset losses elsewhere in your investment portfolio.

The amount you allocate to the trend follower then becomes a question of how much of the remainder of your portfolio do you want to hedge or protect. Best of all this strategy is not insurance or options, which you may pay for and never use (sunk costs). These managers can make money, as long as there are trends to follow, in both up and down markets. They therefore are a perfect compliment to other managers and styles in a well diversified stable of managers.

An author, Certified Public Accountant 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. For a powerful guide to investing called “Make the Trend Your Friend”, visit http://www.intrustadvisors.com.

Investing, in its simplest form is about finding investment ideas, analysing companies and making decisions. Your investment returns can be improved by improving any one of the three activities. In this article I want to give you some ideas on how to improve your decision making. It is something I started a few years ago that has helped me immensely. Give it a try. It may not only, improve your your investment returns but other areas of your life as well.

I have always been an avid reader of anything written by Peter Drucker (1909 – 2005). His ideas on business and management has always been miles ahead of current thinking. At least once a year I try to read an article he wrote called Managing Oneself which is an excerpt from his book excellent book Management Challenges for the 21st Century. In the article Peter describes a technique on how to discover your strengths through the use of feedback analysis.

“Whenever you make a key decision or take a key action, write down what you expect will happen. Nine or 12 months later, compare the actual results with your expectations. I have been practicing this method for 15 to 20 years now, and every time I do it, I am surprised.

The feedback analysis showed me, for instance-and to my great surprise-that I have an intuitive understanding of technical people, whether they are engineers or accountants or market research-ers. It also showed me that I don’t really resonate with generalists.

Feedback analysis is by no means new. It was invented sometime in the fourteenth century by an otherwise totally obscure German theologian and picked up quite independently, some 150 years later, by John Calvin and Ignatius of Loyola, each of whom incorporated it into the practice of his followers.”

I have successfully used this technique to evaluate and improve my investment decisions. Each time I make an investment I write down the answers to the following three questions:

1. What is my reason for buying?
2. What is the security worth?
3. How did I calculate this value?

Don’t write a long story just one or two lines. As I have found that, the longer the reason for buying (the more complex the investment case) is the lower my returns usually are. The simplest investments arguments are usually the most profitable. When I review the investment in my portfolio, after a price decline or receipt of new information, I look at the reason for buying. If the reason is no longer valid I seriously consider selling.

Also when selling an investment I refer back to the purchase decision and add the return on the investment (in total and per year) as well as the reason for the profit or loss. Every six months I compare my decisions with the results. A profit does not automatically equal a good decision. A good decision would be one where the reasoning behind the decision proved to be correct. Was your thinking process that led you to the buy decision correct?

For example a profit made through a completely unexpected buy-out of the company would not equal a good decision whereas buying because you thought a security is undervalued and then profiting from a buyout would be a good decision (the undervaluation made the company an attractive buy-out candidate). I urge you to give it a try, you will be surprised at your findings.

I for example found that:

I am a very bad coat tail investor i.e. buying a security because someone else bought it. I am uncomfortable holding the investment and tend to make bad sell decisions. Either too soon or too late, after a gain has evaporated. Also, if I do too much analysis on an idea I lose my objectivity. I tend to fall in love with the company and tend to see price declines as a reason to keep on buying. Something that has cost me dearly.

That said I am still not 100% sure what my correct amount of research is. But I am sure I am moving in the right direction. Using check-lists as I described in the article What does your checklist look like? is a step in the right direction for me. I also add securities I have sold to to a virtual portfolio as I realised that I often sell investments too soon. I review this “sold” portfolio six monthly to evaluate the quality of my sell decisions. I do this for only up to a year after the investment has left my portfolio as thereafter the investment case may have changes and I have stopped following the company. This has helped my returns a lot as it has, objectively, confirmed my mistake of not letting winners run.

In summary

We make hundreds of decisions every day, some more important than others. If the quality of important decision in our lives can be improved, even only slightly, it can make a huge difference. This is of course also true of your investment decisions. I urge you to put a system in place to improve your decision making. It will show great dividends in your life sooner than you would expect.

Tim du Toit is the editor and founder of Eurosharelab. He has more than 20 year of institutional and personal investing experience in emerging and developed markets. Tim is based in Hamburg, Germany. More of his articles can be found at http://www.eurosharelab.com

Most days I’m on my soapbox about the lousy advice the so many “financial advisors” give their clients. But I’ve decided to do something different today. Maybe it’s the end of the filibuster proof democratic majority that has me in a good mood (Be sure to check out my article on Ending Government Overreach here). Maybe it’s the warmer weather this week after spending last week in Michigan. Whatever it is, I want to say thank you to all of those other financial advisors whose advice I find, well…questionable, no that’s not it, uhm… worthless, no, not that either…

Even bad investment advice has some redeeming value. A man I know owned and then sold his company for millions of dollars in the go-go days. Since that time he has been on a quest for the ideal investment and writes about his experiences. Yesterday, he had identified an expert who said that “now is the time to buy bonds”. Seems foolish to me because government interest rates are at zero, there is concern about inflation, and the way to stop inflation will be to increase interest rates. When this happens, it’s very bad for bonds. But I listened to the advice anyway and…

I looked at the bonds in our portfolios and discovered that the bonds I have maturing in the next five years are priced significantly above maturity value – I bought them at a discount to maturity value before the crash – so we’ve been receiving interest all along.

Thinking it through like this:

I bought them at a discount then, And today in the face of short term maturity and rising interest rates,
I can sell them at a premium (a premium which will disappear as they approach the maturity date).

So I did – sell them. See, even bad advice has redeeming value. So thank you very much Mr. so and so for your advice to buy bonds.

I’d also like to thank all of the “advisors” who counseled their people to buy stock on margin in 2005 through 2008. This advice proved very profitable, because all of those folks who had to sell their stock when prices fell, pushed stocks even further down in November 2008 and March 2009 and with cash we were able to buy great companies at ridiculously low prices in those months and the ones in between. You’d be amazed at what they have done since!

And finally, I would like to thank all the “advisors” who recommend asset allocation to their clients. Every time you sell a sector of stocks, we benefit because we are able to buy plum companies in unpopular sectors for a fraction of what the company is worth. You’d be surprised how this turbo charges investment returns with far less risk.

OK. So perhaps sarcasm isn’t your thing – most of time it isn’t mine either. But like a doctor whose reputation is harmed by the snake oil salesman, I don’t like it when investors are harmed because some “advisor” tells them dumb stuff. Every once in a while blowing off a little steam in this way, well, what the heck!

Dana Barfield invites you to visit his retirement home page http://www.retirementwhys.com and blog blog.retirementwhys.com. Be sure to ask for the report Selecting Retirement Investments when you visit either of these resources.

The first thing to draw your attention at TradeKing is the clear and very usable layout of the website, and along with this the commission pricing, which as quoted by them ‘Not a pricing structure, just a price’ – For all equity and option trades there is a commission of $4.95, plus a contract fee of $0.65 on each option trade, mutual funds have a low fee of 3%, and mutual funds with load incur no fee, and the unloaded fee is $14.95 for buy and sell.

The customer service aspect of the site is very easily found, and they offer an F&Q section, live chat and phone service between the hours of 8am and 6 pm EST time, and also an email service which they strive to respond to within 24 hours.

A wealth of information can be found under the quotes and research tab, as well as trading tools including calculators, scanners and screeners Other services offered on the site include a learning center, forums, blogs – including the CEO´s and Options guy´s content, along with charts and reports, making this a great place for the beginner through to the expert.

The site offers some great security features including firewalls and SSL security, and the username/password combination which becomes blocked upon a set number of failed login attempts. You also have the option to set an automated log off for idle use, which can be set from 15 through to 180 minutes.

I can tell you the three things that TradeKing has going for it, based on the conversations that I have had with some of their clients:

1. Competitive commission structure.

2. Strong customer service.

3. Abundance of useful tools that are available (for free) to TradeKing customers.

TradeKing seems to be a good bet if you are thinking about opening a new online brokerage account.

TradeKing Pros:

Flat Rate Pricing at $4.95 per trade
Helpful customer service
Simple to use Trading Platform
Plenty of great tools

TradeKing Cons:

Lack of full service broker options
No forex or commodities trading priviledges
Slower than average website speed due to high traffic

Overall, TradeKing is a great low priced discount brokerage firm for investors who want to keep costs low while gaining access to all the professional Wall Street investing tools.

Want more valuable information on TradeKing? Read our new TradeKing Review for 2010 to learn how to save money on fees and boost your investment returns by switching to TradeKing.

To learn to invest informed and learn how to invest with confidence most people should break the subject down into two parts: investment basics and investing. By tackling topics or articles in the following order you can learn how to invest money as an informed investor without wasting too much time and effort.

First get a handle on basic financial concepts, terms and investment basics. Every investment in the world can be evaluated based on just a few simple characteristics. Don’t invest money in anything until you know if it fits YOUR needs for such things as safety, liquidity, growth, and income. Only if you invest informed can you avoid the costly mistakes that are caused by picking an investment that’s not right for you.

Then, as a basic investment guide, focus on stocks and bonds because this is where you are most likely to invest money in the future. Once you have a handle on these securities, its time to get familiar with investment markets and how to invest in them. If you don’t understand the stock market, for example, your knowledge of stocks (equities) is of little value in the real world of investing.

Learning all about mutual funds should be your next step and shouldn’t be difficult now that you know stocks and bonds. After all, these securities are where most mutual funds invest money for their investors. And mutual funds are where most investors invest money in stocks and bonds in 401k plans, IRAs and other accounts. There are thousands of funds to choose from but 99% of them fall into 1 of 4 general categories.

You should also get familiar with other investments like money market securities and annuities before you move from the INVESTMENT GUIDE phase of your education to the INVESTING GUIDE segment. In other words, before you can learn to invest informed you’ll need a clear understanding of all of your major investment options and how they compare in terms of their basic investment characteristics. This is not as difficult as it sounds since the universe of investments can be condensed into only 4 different categories or asset classes: cash equivalents (safe, liquid investments), bonds, stocks, and alternative investments.

Investing is the art of putting an investment strategy together and managing your money at a level of risk that’s within your comfort level. Once you understand the investment end of things you need a game plan in the form of a complete investment strategy. Asset allocation is the single most important part of any strategy; and your portfolio asset allocation over time will be the main thing that determines your success or failure as an investor. Concentrate on learning asset allocation: how to invest money (in what proportion) across the 4 asset classes mentioned above.

Now you’ll also want to learn to apply various investing strategies or tools to help offset risk while earning higher than average investment returns. The two important things to understand when you get started in the learning process are the following. Learning how to invest is easier than you think if you take the subject one step at a time in a logical sequence. Second, learning to invest informed is actually a two step process: learn investment basics, and then learn investing.

Don’t get discouraged if you don’t understand something in an investing article you are reading. Back up and search for another article that covers the topic or area that confused you. For example, if you are confused by an article on bond funds it’s probably because you don’t understand bonds in general. Most people don’t. Most people don’t get much out of an adventure novel, either, if they start reading on page 47.

Take fear and anxiety out of investing. Learn to invest informed.

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.

This is a story that you may be familiar with: Bank wants financial statements for your investment property to obtain a refinance. Your CPA requests your financial statements in order to prepare tax returns. It’s been a while since you last looked at your financial records and now you realize that you are several months behind on your accounting and bookkeeping records. With the day to day hustle and bustle, there just isn’t enough time to go through all the receipts, credit card statements, and bank statements to determine where you stand financially with regards to your investment properties. Then a feeling of guilt and stress lingers over you…

If you have experienced this feeling, not to worry: You are one of the MANY that we as CPAs see all the time. Bookkeeping is a tedious process. And frankly, there are not may people out there who enjoy doing it. The two most common complaints that we hear most often are: 1) I don’t have the time to do the bookkeeping and/or 2) I can’t afford to hire a bookkeeper. In this article, we will share some of the benefits of having accurate and up-to-date financial records as well as techniques to decrease the amount of time spent on maintaining those records.

Unfortunately, one of the most common ways that real estate investors keep track of their bookkeeping is what we refer to as the “Shoe-Box Method”. Essentially, this method involves the individual investor stashing all the receipts that have accumulated during the year into a big shoe-box. At the end of the year or tax return preparation time, individuals usually dread having to go through the box of receipts that are now spilling out of the box and spend a couple hours or even days going through and organizing these receipts into some sort of order. Other investors use accounting software to track their income and expenses but don’t really keep them updated on a month to month basis. There are two major flaws with this. First, the investor does not have a clear understanding of the actual performance of the investment property during the year if all the expenses are either kept in a box or not entered timely into the software. Second, receipts may be lost or misplaced and that results in inaccurate income statements as well as lost tax deductions! Those are two big reasons why having an accurate and updated bookkeeping system is extremely beneficial to those who invest in real estate.

So what are some of the benefits of having an accurate and updated accounting system for your investment properties? First, it builds credibility with lenders, buyers, and professional advisors. Imagine trying to take a box of receipts into a bank when you are trying to re-negotiate a loan on your property. The chances that the banker will spend time going through your receipts or relying on your financial information is slim to none. What about when a potential buyer requests to see financial information to determine the profitability of the investment property? Having accurate financial statements not only builds credibility for the property but it also allows potential buyers to do a quick evaluation and move forward in the buying process. Another benefit of accurate bookkeeping is that it allows the investor to review the financial performance of the investment property on a monthly basis. By doing so, the investor is now able to strategically determine where to cut costs, where to increase spending, and identify high performing areas within the investment that can be leveraged or tapped into to increase investment returns. Another important benefit of accurate bookkeeping is the ability to plan for tax deductions. When all your expenses are tracked carefully throughout the year, the chance of losing a tax deduction due to a lost receipt decreases significantly.

Although we all know the many benefits of having accurate bookkeeping, the reality is that most of us either don’t have the time to actually do it or don’t have the money to hire a bookkeeper. A good way to accomplish this would be to hire your CPA to work with you to “set-up” an accounting system that works for your properties. This means having them work with you to set-up accounts that accurately reflect the common and recurring income and expense items relating to your properties. Next, we recommend that you work with your CPA to streamline and automate as much of the data entry process as possible. The 2-step process above will allow you to develop and maintain an accounting system that is consistent with your tax saving strategy and allow for accurate and meaningful tracking of income and expenses for performance analysis. There are accounting software out there that can automate a pretty significant portion of the bookkeeping process. So setting it up correctly can significantly diminish the amount of time you spend on data entry.

Remember that having accurate financial information is a critical component to your success as an investor. It allows you the ability to make informed decisions on ways to increase your return on investment as well as maximize your tax benefits. You may not think you have the time or money for bookkeeping for your properties, but can you really afford to lose out on the tax benefits or opportunities to maximize your return on investment?

Amanda Han is a Managing Director at Keystone CPA, Inc., a firm specializing in tax mitigation strategies for business owners and real estate investors. For complimentary top-notch tax mitigation strategies, visit http://www.keystonecpa.com and sign up for the Monthly Newsletter and Member’s Library.

All business-minded individuals are interested in increasing their returns on their investment. The concept is easy. They want to reap the fruits of what they have sown and business-oriented people want to receive enormous revenues from their businesses.

To increase your return on investment (ROI) it is necessary to understand what it is all about. Your full understanding on this matter will help you predict the benefits you will enjoy and reap from your company. It will also help you to minimize errors and reduce your costs.

To successfully increase your investment returns, it is necessary to consider the following:

1. Consider your time. Your time is one of your most valuable investments, so you must make use of your time very well. If you take into account the time you spend, you always become cautious with your decisions, plans, projects and approaches for both your personal and business life. Time is a necessity for everyone, especially if we want to receive the best from our business. You can never reap mature and abundant fruitage from your vineyard if you will not allow a reasonable time for them to grow well and mature as you cultivate and propagate them. Likewise, you can never expect a business to produce remarkable and predicted results if you don’t spend time to focus on it.

2. Utilize your skills. Each of us is capable of doing a lot of things. We are all creative in our distinct ways. We do things efficiently and effectively when we feel knowledgeable and capable. That means we become satisfied and we attain our objectives. For example, if you enjoy painting and you discover that you are really good at it and some of your works are outstanding, then perhaps you can sell them so you make money from them. The same is true when it comes to business. If we try to open our mind and think of the skills that we have and utilize them, you will absolutely discover what you can do
.
3. Shun unconstructive desires. Desire is necessary to produce beneficial results. But desires can also lead a person to destructive things too. Consider for example your fondness of watching television. Watching TV is not really bad. We learn a lot of things and we become well-informed, but too much of anything becomes counterproductive. Your obsession to watching television might affect your routine activities and your health, and will eventually cause you to be lazy and unproductive. In business, we need to discern our desires and set our limitations when it comes to our personal desires and decisions. Desire impacts our thinking and decision-making. Mistakes from desires are the most difficult to justify and alter. Prevention is always a better option.

4. Develop a sound mind. You can never have a productive business if you don’t have a mature mind. Maturity is your edge in building a business. You cannot approach situations or difficulties and decide accurately if you don’t have a reasonable frame of reference. Realizing your natural and learned gifts of reason will result in raising your return on investment.

“Jo Romano is a National, State, and Community Certified Professional Coach, Organizational Change Consultant and Facilitator with a consistent record of achieving top performance through innovative and collaborative strategic planning and a systems approach to managing a learning organization. She enjoys co-creating with CEO’s, Mid level managers, and team leaders a plan of action that raises up their talents, interests, strengths and passions and achieves their personal and professional desired outcomes. She fosters a holistic approach to the art and science of what it means to be a leader in today’s turbulent times. Free reports: http://www.realworldleaderreport.com and http://www.innercoachingcircle.com “

On the surface, index investing seems like a perfect fit for do-it-yourself investors. The simplistic buy-hold-rebalance mantra of index fund proponents combined with the abundance of help from investing authors and online forums leads scores of informed investors to take on the task of personal portfolio management each year. Many DIY investors never look back; they treasure their newfound fiscal autonomy and the challenge of overcoming future financial hurdles. Others, however, discover that they lack the time, interest, knowledge or discipline to successfully negotiate the dangerous DIY terrain, and they ultimately seek help from an investment advisor. The purpose of this article is to clearly present the rationale for each approach so that index investors can decide which tactic best suits their needs and abilities.

Why Investors Do it Themselves

According to a 2006 study by the Investment Company Institute, the primary reason that DIY investors manage their own portfolios is that they want to be in control. There is a sense of empowerment that comes with making your own investment decisions, and DIY investors, especially men, like holding the reigns. The study also found that the majority of DIY investors believe that they have the necessary information and intellectual ability to make well-informed, prudent financial decisions without the help of a professional. In the minds of these confident investors, advisory fees are an unnecessary expense. Finally, many individuals find personal finance to be a rewarding hobby. According to the study, the majority of DIY investors enjoy conducting their own financial research, crunching numbers and closely monitoring their investments.

Others choose the DIY path not because they love the idea of managing their own investments, but because they dislike the idea of hiring an advisor. You may fall into this category if you place a high value on your financial privacy, believe that most financial advisors are incompetent or untrustworthy, or simply want to save money by not paying advisory fees. The fact that all investment advisors aren’t created equal provides little solace to those whose opinions have been shaped by the numerous investor scandals of the past year or by a poor past experience with an advisor.

Finally, there is a group of investors who acknowledge that they would benefit from professional help but lack an investment account large enough to capture the attention of an advisor. First-time investors often fall into this category and tend to seek advice from public sources, relatives or friends.

Why Investors Hire Advisors

A good investment advisor can add value to your portfolio in a number of ways. First, he acts as a gatekeeper, preventing you from making common return-reducing mistakes. Numerous studies have shown that individual investors routinely give up as much as 7% in annual returns due to frequent trading, attempting to time the market and chasing past performance. Even the most seasoned index investor needs the occasional reminder to avoid distractions and stick with his investment plan.

A good advisor also provides access to research, techniques and investment choices that have the potential to boost returns. By understanding complex issues like tax management, estate planning and retirement forecasting, an advisor can help you better understand the likelihood of reaching your retirement goals and suggest steps that you can take to tilt the equation in your favor. Additionally, he may be able to expand your investment choices by providing access to exclusive fund families or share classes.

Finally, a good advisor performs laborious tasks like portfolio monitoring and rebalancing so that you can devote your time to other pursuits. An advisor who monitors your portfolio frequently can ensure consistency with your risk profile while potentially squeezing excess returns from rebalancing activity.

Conclusion

Many investors want a quantitative answer to the question of whether to hire an advisor; they want to know definitively whether an advisor would provide them with higher investment returns after fees. In order to answer this question, you must first ask yourself whether you have been able to develop and consistently implement a low-cost, disciplined investment plan on your own. Many investors don’t have enough interest, knowledge or ability to develop a sensible plan; even more lack the necessary discipline to follow one. If you find yourself veering off the path to chase a hot new sector or time the market, there’s a good chance that an advisor would bring some return-boosting discipline and objectivity to your investment decisions.

If you do possess the mental and physical fortitude to develop a sound plan and consistently stay the course, you should probably look to qualitative factors to make your decision. For instance, would you rather spend the time that you dedicate to investment management on other things, like visiting family or pursuing other interests? For many investors, the answer to this question changes later in life as financial situations become more complex, the consequences of poor decisions become more severe, and time with family becomes a bigger priority.

The bottom line is that managing your own index portfolio may be simple, but it’s not easy. If you decide to oversee your own investments, defend yourself against the tendency to stray from your investment plan by drafting an Investment Policy Statement. If you decide to hire a professional, choose a fee-only advisor who agrees with your passive investing philosophy, embraces his fiduciary responsibility to act in your best interests, and is willing and able to add value in the ways described above. Whichever path you choose, you can maximize your chances of investing success by accurately assessing your risk attitude and capacity, designing a diversified, low-cost portfolio, and sticking with your plan.

George Watkins is President of West Wind Wealth Management, an independent investment advisory firm that specializes in index portfolios. He has a BS in Economics from Duke University and an MBA from Harvard Business School. To download helpful tools and tips for DIY investors, purchase a personalized index portfolio recommendation, or inquire about full-service wealth management solutions, visit http://www.invest-it-yourself.com.

The majority of advice given to individual investors relates to developing an investment plan: evaluating risk tolerance, choosing an appropriate mix of assets, controlling costs, etc. While these considerations are all important drivers of investment success, a singular focus on plan development often causes implementation to suffer.

In order to promote the disciplined execution of a portfolio’s investment strategy, pension plans, foundations and trusts often draft an Investment Policy Statement (IPS). This document formally outlines the investment objectives, philosophy, boundaries and procedures for managing the portfolio so that plan advisors don’t stray from their clients’ intentions. Individual investors can get a similar benefit by drafting their own Investment Policy Statements. A brief, well thought out IPS can help an investor stay focused on his goals and systematically resist the natural human tendencies that seriously harm investment returns.

Investors Behaving Badly

There’s an abundance of research on individual investor behavior, and very little of it is encouraging. Barber and Odean’s landmark study, in which 66,465 household accounts were examined from 1991-1996, found that individual investors trade too frequently, thus destroying returns. The most active traders in the group underperformed a buy-and-hold portfolio by over 7% annually, while the average investor’s returns lagged an inactive portfolio by over 2% per year. According to the study, the root cause of this behavior was overconfidence, a trait that was especially pronounced in men. Specifically, investors were confident in the future movements of the overall stock market or a particular sector, and they invested accordingly. Unfortunately, they were frequently wrong.

Similarly, Dalbar’s 2009 version of its Quantitative Analysis of Investor Behavior study examined the returns of mutual fund investors from the beginning of 1989 through the end of 2008. The study found that the average US equity investor earned an annual return of 1.87% compared with the 8.35% annual return of the S&P 500. The stark difference in performance, according to the study, could be attributed largely to investors abandoning equity mutual funds during declining markets (selling low) and reinvesting following a market rebound (buying high). The study doesn’t pinpoint a solitary causal factor, but this phenomenon usually occurs when investors overestimate their risk tolerance, misunderstand the risk-return tradeoff, or seek safety in numbers through “herd” behavior.

How an Investment Policy Statement Can Help

Fortunately, there are steps that DIY investors can take to counteract their destructive behavioral tendencies. First, it’s important to develop an investment plan consistent with your risk attitude and capacity. When unsure whether a certain level of portfolio volatility is acceptable, it’s prudent to err on the side of conservatism. The worst time to discover your risk tolerance is during a market decline. When determining your target asset allocation, it’s also a good idea to specify events that would trigger a portfolio rebalancing. Without specific rebalancing criteria (e.g., acceptable bands for each asset class), the door is left open for impulsive trading.

Next, formalize your plan in an Investment Policy Statement. An IPS should include your investment objectives, account balances, current income and future liquidity needs, risk profile, target allocation and rebalancing bands, investment philosophy and fund selection criteria, and plans for periodic IPS reviews. Drafting an IPS may seem burdensome, unnecessary or redundant, but without the ongoing help of an investment advisor, this simple document performs the vital role of a bad behavior gatekeeper. When you’re tempted to abandon your risk-appropriate allocation during a market downturn, your IPS will remind you of your investment plan’s rationale and encourage you to stay the course. When you get a “can’t miss” stock tip from a friend, your IPS will tell you to keep your distance. And when you get your investment account statement at the end of the year, your IPS will provide a valuable performance measuring stick. Your IPS could be all that stands between you and your return-reducing behavioral tendencies; don’t pass up this opportunity to add discipline to your investment plan.

Conclusion

Legendary investor Benjamin Graham said, “The investor’s chief problem – and even his worst enemy – is likely to be himself.” There’s plenty of research confirming Mr. Graham’s hypothesis, but fortunately, there’s hope for the individual investor. By understanding the impact of human behavior on investment returns and devising a disciplined plan of attack in the form of an Investment Policy Statement, DIY investors can overpower damaging behavioral forces and increase their chances of achieving their financial goals.

George Watkins is President of West Wind Wealth Management, an independent investment advisory firm that specializes in index portfolios. He has a BS in Economics from Duke University and an MBA from Harvard Business School. To download George’s sample Investment Policy Statement (IPS), view other tools and tips for DIY investors, or to purchase a personalized index portfolio recommendation, visit http://www.invest-it-yourself.com.