8 Steps to get Your Investments on Track After Thanksgiving, I had some thoughts to share. It is a little long but could be very helpful. You know money is a multi-faceting thing. It can be converted into things, or services, or investments that can grow to buy more things in the future. In and of itself, money should be treated rationally for with an almost scientific strategy, but the reality is that we get emotional about it. When we get emotional, we usually get into trouble and make money mistakes. Oh we might tell ourselves that we are not irrational about money, but deep down we know something is missing. The future can be a scary thing. Do you know what you really want from life? Have you clarified what you want your money to do for you this year, next year and for the next 10 years? It can be a daunting task even thinking about it because many times you can wish for something, get it in the future and wish you never achieved the goal. It doesn’t really matter because we have to define goals and shoot for some objective in order to keep the ball rolling, and if you don’t plan and take action, you have no control over where you will be. As you wrap up 2013, people create their New Year’s resolution. People will start hitting the gym to try to lose weight, only to give up by February. Others will resolve to get their finances under control but will let the process die when they have to start asking uncomfortable questions about their personal finances. We all know deep in our gut that we should not define ourselves by the size of our bank account. Why do we have such a hard time detaching our self-worth from our money? Why do we find ourselves thinking “I will get to that someday” only to put it off indefinitely? Why do so may people lose money with their investments? I believe it is because of two things – psychology, and lack of a proven process that works. I’ve found that success comes to those people that following certain basic tasks. These steps have to be done well and reviewed regularly in order to work properly. If you do these things systematically, you will likely find success with your money or continue your good fortune. Don’t let the simplicity of these steps fool you. You may think, “Oh, I already know this”, but I’ve found the gold nuggets to be hidden in the details. What matters is how you EXECUTE the steps and how INNOVATIVE you can be with developing your solutions. So here are the steps: Step 1: Identify Objectives. In this step you have to think about what is important about money to you. Think about that for a moment. Don’t jump to a conclusion like “To have a comfortable retirement” or to have “x” amount of money by some date. Yes that part is important and must be defined but before you can truly get your psychology right, you must understand what is important. As you keep drilling down, you will find it is not about the dollars, but about what the money will do for you and your family. Be sure to determine what is meaningful to you at your core. This gets down to your true values. Step 2: Prioritize Goals Once you have some clarity about where you want to go, the next step is to prioritize your goals. This should be done in a systematic way, comparing each goal to each other. Ask yourself, is goal A more important than goal B? What about goal C?. Compare each goal this way until you have an ordered list of your goals. Step 3: Gather Data Now it is time to get your data together. There are two main types of data, factual, and preferential. The factual data consists primarily of your assets, liabilities, taxes, income, and expenses along with your asset allocation, insurance details and other business data. The preferential data consists of your risk preferences and other “nice-to-have” pieces of information. This process can take some work, but it is strongly recommended that once you do this process, you make sure you can get it together and gathered quickly in the future by having a system for organizing your information. Step 4: Analyze Data The goal of this step is to make sure you have a good understanding of your current situation and identify the areas of improvement. At this stage certain aspects of your current financial position are analyzed including your liquidity, net worth, and assessments of risks. Ultimately, you will want to monetize your goals into dollar amounts and time frames. This is important because much of the analysis must be done with a process that considers the time-value of money, and a sophisticated stochastic process that accounts for the uncertainty associated with the economy and changes in your lifestyle. Step 5: Develop Realistic Solutions Now it is time to figure out how to get from where you are to where you want to be. Getting to solutions for your goals required a combination of creative-thinking and strong analytic skills. Here you need to develop realistic scenarios or courses of action that you could take. Each one of these options need to be analyzed for their benefits and costs. The benefits and costs need to approached from a money point-of-view as well as from other vantage points. Each decision may affect people in your family, or business associates or other stakeholders in your life. Every important aspect of your life must be assessed. In fact, it can be helpful to list the areas the will have the most weight in your decisions. There can be many trade-offs and you should define them clearly knowing that you are OK giving up something to get something else. Your primary goal is to have it all. Ask yourself, how can I achieve all of my goals first before you start looking at trade-offs. After you have laid out the alternatives, and assessed the best course of action it is time to implement your strategy. Step 6: Implementation This is where rubber-meets-the-road. Many mistakes can be made when implementing your plan so it is crucial that you have thought through each element of where you are and what it is going to take to get on track. Do any of your positions have taxable gains that should be considered? Are accounts titled appropriately given your estate and investment goals? Should you consolidate accounts from your old 401K and IRA? Should you be investing in stocks, bonds, currencies, commodities? How much room for tactical shifts do you want in order to respond to economic conditions? Do you have some investments that should be kept and which ones are dogs that should be sold? Step 7: Monitor Progress In order to make sure your investment is performing appropriately you need to have standards of performance. There are many ways to create your benchmarks. It can be a blend of indexes such as the Russell 3000 and Barclays Aggregate Bond index, or it can be some absolute return above the inflation rate. Be sure that you understand the risk associated with your benchmark and that it is appropriate for your risk tolerance. There are measures of risk and return that should be associated with your benchmark and they should correspond with your goals and time frame. Step 8: Making Adjustments It is crucial that you adjust your portfolio for changes in the price action of the markets, the economic environment and changes in your personal situation. The amount of tactical shifts you make in your accounts should consider taxes, slippage, and transaction costs. Make sure that you have a good match with your responsiveness and adaptation to changes in the markets. Managing risk is one of the most important part of this process and should be a center-piece of your portfolio strategy. I hope some of this can help you in your financial endeavors.
Posted on: Sun, 01 Dec 2013 00:46:43 +0000
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