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Archive for January, 2009

Talking heads are ceratinly entertaining.  But listening to them can be dangerous to your financial health.  Think of it much like junk food:  Just empty calories.

Beyond listening to the talking heads in the media, an individual is best served by getting a handle on three important things:  appetite for risk, goals, and a road map. 

 And like dieting or exercise, some people do better with a coach to help them stay on track.  Working with a financial planner will help anyone understand these issues, tailor a plan suitable for the unique situation of a person and keep an individual focused on what is really important for the individual.

 Everyone says they’re willing to take on risk until there is a meltdown.  Understanding risk means being honest with oneself.  It starts with an assessment of your values and experiences. It begins with probing questions about attitudes toward money.  I recommend that individuals use the risk assessment tools found on the internet to get an honest appraisal of their risk appetite.

 Start with the end in mind.  How will you know if you’ve arrived at your goal if you don’t know where your destination is?  Ask yourself whether it’s more important to you to beat an index or benchmark or to achieve your goal?  By having an idea of what you want as an outcome, then you won’t be unnecessarily diverted by the distractions of daily trading and financial white noise in the media.

 And to get to any destination it’s really helpful to have a road map … or in today’s technology, a GPS.  Yes, all roads may lead to Rome but some are more direct, some are filled with potholes or other dangers. 

 So this is why it is absolutely helpful to follow the best practices of large institutional investors who use carefully drafted Investment Policy Statements (IPS). 

 The IPS is the road map guiding the individual and his financial investment team.  It defines what the investment strategy is, what types of investments will be used and how they will be selected, the strategic asset allocation will be determined, the criteria for buying, selling and replacing investments.  This way there is less of a need to depend on the headlines and talking heads.

 In my practice, I go through these steps and apply them within the following framework:  RATE.  R stands for risk assessment.  A stands for Asset Allocation.  T stands for Time Frame. E stands for Expectations.  By combining these elements and understanding the client’s needs, end goals and resources, a custom-tailored program is created.

 Will this bullet-proof a portfolio?  No.  Even large institutions have lost money in this market turmoil.  But it does provide the compass to keep clients on track and focused on the end goals – whatever they may be.

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