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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, February 9, 2003
One day you look at your investment game plan and realize
that it has square wheels, not round wheels.
Frustration with the markets has led many to make dramatic
changes. Like sweeping out equities and embracing bonds.
Perhaps they are jumping from one fire to another.
If what you are doing now is on target, little tinkering
is likely required. Your investment game plan should
not change dramatically if it is well positioned to
begin with.
Revitalizing the game plan can deliver real benefits
- especially if you are piloting with the square wheels.
Start here:
Get a close look at your financial house. The goal is
to trade in the square wheels for the round ones.
Ask yourself one simple question: "What is important
about your nest egg to you?"
A comfortable retirement is usually the biggest reason
to accumulate the nest egg. So, make sure you know where
you are heading.
Many investors focus on preservation of capital. Some
emphasize growth. Others require the income stream to
support that comfortable retirement.
Practically everyone wishes to minimize probate fees
and income taxes. Some wish to leave an estate to their
loved ones or focus on their small business. You decide
what is important to you.
Look long-term
Seasoned investors have learned to factor in a bear
market into investment expectations.
Speaking of which, we have had 10 bear markets since
World War II. They are a natural part of the investment
experience.
Investing is not about what's hot today, next week,
next quarter or next year. It is about what you would
like to own five to 10 years from now.
Tune out the daily hype and ensure that your investment
time horizon is at least five years.
Understand what you're doing
Take the time to understand the size of portfolio required
to sustain your desired retirement lifestyle. Then calculate
your personal rate of return required on your investments
to achieve that goal.
That personal rate of return may be the appropriate
"minimum portfolio investment return" being
pursued in your portfolio. Of course, be mindful of
the amounts of risk you can tolerate.
Check that your investment personality matches your
portfolio composition. The venerable "diversify,
diversify, diversify" still works extremely well.
Try to shed that emotional attachment to investments.
Instead, adopt an appropriate strategy to deal with
losses. Something like 30 per cent and out.
Allocation, allocation, allocation
Concentrate on asset allocation. Nobel Prize-winning
studies concluded that asset allocation decisions have
the greatest impact on portfolio returns. Neither stock
selections, nor market timings were even close.
Asset allocation decisions explained, on average, 94
per cent of the contribution to total return. Clearly,
this is the important focus for every portfolio. So,
make doubly sure the mixture of investments is appropriate
for your situation.
The road to success is having a game plan fitted with
the round wheels.
The incentive to revitalize the game plan is that you
avoid virtually all the common investment pitfalls.
This alone is sufficient reason to trade in the square
wheels.
Be prepared for some stormy sessions. Grip firmly and
stay the course with your game plan. That is, the one
with the round wheels.
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