Now that the stock market has continued to rally from its March lows, many investors feel comfortable opening their statements and are happy to start heading back into a positive direction.  Most people are no longer in a panic state and aren’t paralyzed by what seemed like daily losses on Wall Street last year and in the beginning of this year.  Unfortunately, too often, we see people get comfortable at this point and put off updating their investment process because things seem to be fine.  The problem with getting comfortable and not updating the investment process is the next time things get tough, an investor may just move back into a panic state and make poor investment decisions that could hurt their long-term plan.  A great strategy to implement is to create an Investment Policy Statement to prevent emotions from getting involved in the future.

The Investment Policy Statement lays out the expectations of investments and details the process to reach various financial goals.  This can be a great exercise to go through, as it helps an investor clarify the plan and process. It also is a great tool to use now that the stock market has improved because you are more likely to use realistic expectations, versus what may have been created in a panic a few months ago.  Using this process will give you a guideline to follow  next time things aren’t working as planned.  Having the process detailed in writing can also make it easier to figure out what the actual problem is.

The Investment Policy Statement can be as unique as you are.  There is no one statement that fits all investors.  Start by figuring out what is important to you.  For example, safety could be a primary concern for a retiree.  Safety is important because retirees don’t want to run the risk of running out of money.  They are concerned about not running out of money so they can be in control of their future.  Complete this exercise with the three biggest financial concerns you have.  One could be retirement, another could be putting a child through college and a third could be planning for a second home.  Whatever your three goals are, write them down and ask yourself what is important about each of those goals. Expand on your answers at least three times as we did in our example.

The next step is to write down what has been done so far to reach those goals.  Write down the amount of money allocated toward each goal.  An investor should look at what is the current method or process used to try and fix a current concern or the steps to take to reach a goal.  Think about what tools you have used to solve these problems in the past.  Are those tools the most effective ones?  Typically, we would write down how much time you are spending, what has been the focus and how much money it takes to solve these problems.

Now take a look at where improvements could be made.  For one, take a look at how much risk there is.  Write down the maximum amount of risk you are willing to take in both percentage terms and in dollar figures.  Oftentimes, we find investors are taking too much risk and that could have a drastic negative impact on their plan if the stock market went down in the near future.  So, look for ways to reach the goals, while at the same time lowering the risk level.  This can be improved usually by proper diversification, asset allocation, using other investment products or taking a different approach.  The other areas that seem to hold a lot of investors back is the fees and expenses that eat into the total return of an account.  Look at both the disclosed and undisclosed fees and expenses in each of the investment accounts.  Decide what fees can be eliminated that are not adding value to the approach and look at reducing the cost of the plan.  Making these improvements could go a long way to helping create your perfect Investment Policy Statement.

Education is an ongoing process.  It is good to know what is going on financially, but it is more important how you use that knowledge.  If you are frustrated about any of your current financial management processes, then an Investment Policy Statement may be just what you need.  If you would like a copy of the complete discovery form we use, simply go over to our Web site at www.RetirementGuysRadio.com and download a copy of the Investors Repair Kit.

For more information about The Retirement Guys, tune in every Sunday at 11 a.m. on 1370 WSPD or visit www.retirementguysradio.com.  Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537.

This entry was posted on Thursday, November 12th, 2009 at 9:28 pm and is filed under Retirement Guys, Toledo Business Link.
You can follow any responses to this entry through the RSS 2.0 feed.
You can skip to the end and leave a response. Pinging is currently not allowed.