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By Adrian Mastracci
North Shore News
Business Section, "Loose Change"
Sunday, May 06, 2001
Investors charting successful personal wealth
accumulations are advised to first put in place
a written investment plan. This plan is also known
as the "long-term game plan", the "investment
policy statement", the "financial blueprint",
or the "asset allocation plan".
The most notable investor omission is not having
a written plan in place before investing. Think
of it as building your home without the blueprint.
Many investors also spend too much time on the
selection process and not enough time on the "investment
policies and strategies" they will follow to reach
their unique goals. I am often asked, "What is
the best way to manage money?" My reply is that
managing money is a marathon, not a 100-yard dash.
The proven and consistent approach to create,
grow or preserve wealth is with the long-term
perspective.
My experience is that asset allocation decisions
have the greatest impact of any factor on investment
portfolios. Not stock selections or market timing
strategies.
Asset allocation means the combination of the
choices of asset classes (such as cash, bonds,
and equities) and the choices of asset mix (such
as Fortune 500 companies versus smaller companies)
that you include in your portfolio.
The 1990 Nobel Prize winning studies concluded
that long-term decisions explain the bulk of investment
returns. These studies found that over time:
- Playing the market had little impact on portfolio
returns, with stock selections explained, on
average, 4% of the contribution to total return.
- Shifting assets in and out of the markets,
or between classes explained, on average, 2%
of the contribution to total return.
- Long-term asset allocation decisions explained,
on average, 94% of the contribution to total
return.
The solid foundation for financial success is
your game plan that outlines the investment policies
you will follow to reach those unique personal
goals. The focus is on asset allocation decisions.
My approach to the game plan is to cover the
personal criteria in these major categories:
- Long term goals, with emphasis on financial
independence and retirement aspirations.
- Investment objectives for the non-registered
(i.e. personal, business, family trust accounts)
and registered (i.e. RRSP, RRIF, DPSP, RESP)
funds.
- Asset allocations related to investment personality
(i.e. conservative, income, balanced, growth,
aggressive).
- Investment time horizon and tolerance for
risk.
- Income and capital draws from the portfolio.
- Income tax and estate considerations.
- Selection of the appropriate securities.
- Disposition, acquisition and holding costs
of the securities.
- Transition from the current to the suggested
portfolio.
This is a prudent and organized approach to personal
wealth accumulation. Investors who focus on investment
policies and strategies make more appropriate
investment selections, and are rewarded with returns
more in keeping with expectations.
Personal wealth should be guided by a thoughtful
plan that withstands the tests of time. Charting
or revisiting the long-term plan is always a valuable
exercise, especially for investors who are contemplating
or have achieved retirement.
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