Equity Recap

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Coaches don’t go into game day without a plan, business people don’t start a company without a plan, and generals don’t go into battle without a plan. Investors should never go into the market without a plan either. ‘A failure to plan is a plan to fail’ goes the saying, and that definitely holds true for investing. Formulating a solid investing strategy is a key step in realizing your investing goals, even if you have already started actively investing. A solid plan can show you where to start and where to turn in possible times of stress. This plan is simple yet can be time consuming, but as important as your investments are it will be time well spent.

Step 1- Determine Your Risk Tolerance

Your general personality is one of the biggest guiding factors in how you are going to invest, and there are investing plans and vehicles for just about every personality type out there. Generally we have a good idea of how ‘risky’ a person we are, but when it comes to our money it can be a different story. Sure you may love skydiving, but can you handle watching the value of your portfolio decrease by 25% in one day? This determining factor, along with many others, is going to help decide what investment vehicles to put your money into. To help determine your risk tolerance I will provide this resource for your use: Investment Risk Tolerance Quiz (Note: be sure to follow the “Click Here to view a list of investments…” link). This is just one quiz and only an approximation, so feel free to search for other risk tolerance resources to determine yours more accurately.

Step 2- Set Your Asset Allocation

Determining how and what you are going to invest your money into is asset allocation. This goes along very much with your risk tolerance, but it is the actual manifestation of your risk tolerance results. A general investor’s asset allocation is going to be in stocks, bonds, mutual funds, and currencies. These are not by any means the only investment vehicles out there, just some well known examples. According to many, asset allocation is the largest determining factor in the returns you will realize on your investments. Some academic research even says 90% of returns are determined by it. So where to start with such an important decision? There are many determining factors in choosing your asset allocations, including; age, health, income, marital status, risk tolerance, etc. Since I am personally no expert on this matter I am going to refer you to more qualified resources, but keep in mind again these are merely guides and the final decision is up to you. Asset Allocation Questionnaire and Asset Allocation Calculator

Step 3- Open Your Accounts

Hopefully by now you have a good grasp on what kind of investor you are and where you need to put your money. Now you just have to decide how and who you are going to enact your investing strategy through. I would implore you to read my previous article How to Reduce Investment Fees for further insight on this step. Many of you probably already have investment accounts open, so if you’re satisfied with them go ahead and skip to the next step. For beginning investors this step can be an important decision in enacting your investing strategy. There are many different investment companies out there, but here I am going to list some of the better known and more trusted ones of which I am aware. I will associate these companies with what investing strategy they would be best implemented with.

Aggressive/Experienced Investor- If you are a more aggressive investor you are probably going to be more into stocks and possibly options or currencies, and enact more transactions Scottrade is a great broker with decent prices on trades and favorable customer support. Zecco provides even cheaper trades but customer support may not be on par with others. Currencies are a different broker altogether, but generally you want to find the one offering the lowest bid-ask spreads.

Moderate/Average Investor- If you are a moderate investor, or even a beginner, you are probably going to have a lower volume of transactions and want more guidance. Your investments are probably going to fall more into mutual funds and ETFs. For these type of investments you probably want a traditional investment house such as; Vanguard, Fidelity, or T. Rowe Price. These are large well known companies with great customer support and services.

Very Low Risk/Hands Off/Absolute Beginner- By now, just by reading this article, you should have enough investment savvy and knowledge that you can use the main investment services listed in the Moderate category which include; Vanguard, Fidelity, and T. Rowe Price. If you are very unsure about investing but still desire to, you might possibly want to try a financial advisor. There exist many different financial advisors from large banks to traditional firms to individual advisors, all offering a range of services at a range of prices. Be aware though that a financial advisor is going to cost significantly more than doing it yourself. Here is a resource that can help you find one

Step 4- Select Your Investments

Now, this should be the easy yet exciting part of your investment strategy. Depending on your strategy so far and your investing experience this step can vary greatly. I am not even going to try and attempt to tell you which stocks, ETFs, mutual funds, or bonds to invest in here (although you can access my stock analysis reports, which do, here). I will tell you to read and do your homework before selecting whatever investment vehicle you have decided upon, and to make sure that they align with your results in the previous steps. And really, these investment decisions shouldn’t be all that intimidating at this point. Remember, you have already determined about 90% of your returns already from your results in Step 2.

Step 5- Rebalance Your Portfolio

So, remembering again that your asset allocation is the biggest determinant in your investment returns you want to make sure your balance stays where it should. For example, say your portfolio originally had a 40% value in stocks. The market went up, causing your stocks to appreciate (yay!) and now stocks amount to 50% of your portfolio value. Another example might be that you are getting closer to retirement and would like to reduce your risk exposure to the stock market. You essentially have two different options you can go about rebalancing your asset allocation. You can 1. Take new money and buy new amounts of whatever (stocks, bonds, etc.) to achieve your asset allocation balance or 2. Sell some overrepresented assets and purchase underrepresented assets to achieve your asset allocation balance. You should look at your asset allocation balance, and rebalance if necessary, at least every 6 months.

There you have it, your 5 step strategy for reaching your investment goals. This plan is not fool proof, as it involves inherent risk from investing in the financial markets. Yet, with this investing strategy you will be better equipped to handle that risk. Remember to reassess your investing goals periodically and to reassess your investing strategy accordingly. Happy investing