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| Adrian Mastracci, president
of KCM Wealth Management says "Investing
is about setting a course to achieve a specific
return to meet long-term goals." |
Vancouver, BC (December 17, 2001): 2001
will be remembered as a tenacious bear market
year, well renowned for persisting turbulence
and plenty of uncertainty. Most investors are
still feeling its far reaching effects and are
happy to see this chapter vanish into the scrolls
of history.
Before you close the book, it's instructive to
reflect about what can be learned from this experience.
One that nobody looks forward to repeating anytime
soon!
To accomplish just that, let's ponder the question
"How short is your
long-term perspective?"
As a point of reference, a popular dictionary
defines "long-term" as meaning "for
or extending over a relatively long period".
Adrian Mastracci, president & fee-only
investment counsel at Vancouver based KCM Wealth
Management comments, "Investing is about
setting a course to achieve a specific return
to meet unique long-term goals. However, many
investors have lost sight of the meaning of long-term
portfolio strategy."
"An appropriate long-term investment perspective
is a vision of at least five years, often much
longer," notes Mastracci, "Thus, it's
important for each investor to reflect on the
meaning of long-term perspective as it relates
to the personal situation."
"Over time, many investors become preoccupied
with performance and instant gratification,"
says Mastracci, "When this happens, investment
perspective is compromised, patience becomes a
forgotten virtue and the soup du jour portfolio
takes a firm grip."
"Investors have also become glued to the
deluge of daily news and expert advice,"
notes Mastracci, "Consequently, emotions
drive many investment decisions and portfolio
changes occur with little regard for the long-term
implications."
Mastracci offers five observations on investor
habits of today:
- Investors spend too much time on the selection
of every stock and mutual fund.
- Investors spend too little time on the strategies
they ought to follow to reach their personal
goals.
- Investors easily embrace the euphoria of
picking winning stocks and mutual funds. The
occasional investment home run is exciting,
but it's the losers that inflict serious portfolio
damage.
- Investors often buy practically anything
just to be invested. The months of January and
February of the "RRSP season" provide
solid evidence.
- Investors seldom build a house without a
plan. However, too many of the same investors
build their financial house without a hint of
a game plan.
"Let's put long-term investment strategy
in perspective," indicates Mastracci, "The
1990 Nobel Prize winning studies demonstrated
that asset allocation policies have the greatest
impact on portfolios. Not stock selection, nor
market timing."
"Asset allocation is the combination of
the choices of asset classes, such as cash, bonds,
and equities," Mastracci explains, "Further,
it's the choices of asset mix, such as large versus
small companies, that make up portfolios."
Mastracci illustrates the interesting findings
of the 1990 Nobel Prize winning studies. They
concluded that over time:
- Market timings explain, on average, 2%
of the contribution to total return.
- Stock selections explain, on average, 4%
of the contribution to total return.
- Long-term asset allocation decisions explain,
on average, 94%
of the contribution to total return.
"It is very clear. If asset allocation is
not the focus in the investment portfolio, it
ought to be," notes Mastracci, "Accumulating
a successful portfolio is a marathon, not a 100-yard
dash. Accordingly, investors need to rediscover
their long-term perspective."
Mastracci outlines five long-term commitments
that pave the way for successful portfolios:
- Develop a written asset allocation plan consistent
with your personal goals, investment time horizon,
investment personality and acceptable risk levels.
- Be confident in your chosen strategy. This
removes the tendency to make investment decisions
based on emotions.
- Discipline yourself to stay the course throughout
the many correction periods. Some may be dramatic,
frequent and/or lengthy.
- Have patience with your chosen strategy. A
long investment horizon increases your probability
of success.
- Muster the courage to ignore the daily bombardment
of conflicting research and expert advice instantaneously
available from several sources.
Mastracci begins with this question for each
client, "What is important about money to
you?"
- Is it a comfortable retirement for you and
your family?
- Is it enjoying more leisure time with your
family?
- Is it the preservation of your current portfolio?
- Is it long-term growth of your portfolio?
- Is it the succession of your small business?
- Is it minimizing your estate taxes and income
taxes?
- Is it funding education for the children or
grandchildren?
- Is it leaving a legacy to a charitable cause
and to your loved ones?
"My premise is that every portfolio should
be guided by a game plan that withstands the tests
of time," indicates Mastracci, "Investments
can be risky when the investment horizon is short,
which I define as less than 5 years."
"The centerpiece for financial success is
the long-term game plan that outlines the investment
policies investors will follow to reach their
goals," concludes Mastracci, "The proven
approach to a successful portfolio is with the
long-term investment perspective."
"Investors who concentrate on investment
policies and strategies make better portfolio
decisions," summarizes Mastracci, "They
are also rewarded with returns more in keeping
with their expectations."
"Take the time to reflect upon your long-term
perspective. Make your understanding of that vision
a priority. It's an essential part of successful
investing," notes Mastracci.
"Your marathon will not be smooth sailing.
Do expect some encounters with rough patches,"
comments Mastracci, "Grip the wheel firmly
and focus your eyes on the long-term horizon."
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