Successful Investment Planning:  Demystifying the Process
By Mike Lopus
Auto Dealer Alert, November 2005

Many business owners avoid investments in the capital markets due to fears of the unknown or frustration with past forays into the stock markets. Many individuals have made investments over the years that have "failed." For most investors, failure is measured based on whether they made or lost money on the investment, sometimes over inappropriately short periods. Many investments are made with an eye toward return, without regard to the risk that’s being assumed by the investor.  In many cases there’s no clearly defined exit strategy for the investment and no clear plan for measuring relative performance. At the end of the day, the investing failure is not a result of a failure of the investment plan but rather the failure to have an investment plan. The absence of an investment plan typically leads to emotional investment decisions, which are driven by greed during rising markets and fear during periods of market decline.

The following factors should be considered in the development of an investment plan:

• What’s the investment time horizon for the investment portfolio? Longer investment time horizons allow for more aggressive investing. While returns are highly unpredictable over one-year periods, they become more predictable over a longer time horizon. In fact, the S&P 500 has produced a negative return in only one 10-year period since 1926. 
• What asset classes will be included in the investment portfolio? Over longer time horizons, the markets compensate equity investors for taking additional risk beyond those taken by fixed income investors. The decision regarding the allocation to more volatile, growth-oriented equity investments versus more stable, income-oriented fixed income investments will have the greatest impact on the long-term returns and volatility of a portfolio.  
• What sub asset classes, styles, and strategies will be used within the portfolio? Traditional portfolios for U.S. investors have included primarily investment grade domestic bonds and large cap U.S. equities. Broader diversification into high yield and international bonds and mid cap, small cap, and international equities can enhance return and reduce risk if managed appropriately. Further, evaluating the use of active managers versus indexing or incorporating a value or a growth bias in various components of the portfolio are additional considerations. The avoidance of performance chasing between the sub asset class targets is critical. 
• What managers will be hired to manage each portion of the portfolio? Many investors hire managers (either through separate account programs or via mutual fund investments) based on a recent track record versus the S&P 500. As noted above, broader diversification away from the S&P 500 can provide benefits; however, it’s important to hire specialists to manage each portion of the portfolio and to measure their performance based on benchmarks that are agreed upon prior to making the investment. Confirming that individual managers are complementing each other in their holdings rather than creating redundancy in the portfolio improves the integrity of the portfolio and enhances diversification. 
• Do you understand the costs of each investment, including direct fees and expenses and the individual investment’s tax consequences? It’s also important to understand the tax implications of various investment accounts and to structure the portfolio to maximize after-tax return. The only return that accrues to the investor is the return after taxes and fees.
  
  In addition, it’s beneficial to document the conclusions via a personal investment policy statement. Documenting the conclusions reached above and referring back to them in times of market turbulence can remove much of the emotion from the investment decisions and demystify the investment planning process. Ultimately, formalizing this plan should also improve your likelihood of success. If you have any further questions regarding the investment planning process, contact Mike Lopus at Plante Moran Financial Advisors at 248.223.3364.