How to Choose an Investment Strategy

There are many factors which affect choosing an investment strategy. The first set of factors begins with you, our client. Our disciplined discovery process is key to understanding the right investment strategy for your specific situation. Once we have the answers from our clients, we begin to think about the second category of factors which involve the overall health of the economy.

Here are common questions we ask as we walk through the investment planning process:

  1. What is the goal of the funds? Are they to be used now, at some point in the future, or are they funds you would like to leave as a legacy?
  2. What are the expectations you have for these funds when it comes to risk and reward?
  3. What part of your portfolio do the funds we are investing represent? What percentage do they represent in your liquid portfolio and overall portfolio?
  4. Are the funds qualified for tax deferral?
  5. What is your comfort level with investing, or how much investment expertise do you have?

The initial discovery process has to be thorough, which is why top financial advisors will include financial planning, not just investment management, as part of the services they provide to their clients. At Carson Wealth, we believe all of our clients should have a financial plan, which is why we view it as the skeleton of the process. Once we get to know our clients and we have walked through the basics, we decide whether we need to create the asset allocation plan or simply find the spot in which the funds we are going to invest fit within an already established plan. It is at this point when I ask myself and our team economy questions, such as:

  1. What is the current state of the domestic and global economy?
  2. What is the state of the local economy?
  3. Where are we in the business cycle?
  4. How are certain industries and sectors performing relative to each other?
  5. What is mine and our team’s overall expectation of the market?

By combining both the client category factors and overall health of the economy factors we arrive at a place where it becomes very comfortable to make the asset allocation decisions. This is when I ask myself a very important question:

Do I need to make an allocation to Irreplaceable Capital?

Irreplaceable Capital is the amount of money we must protect from a downturn in the market. This is different than clients not wanting to lose money; no one likes to lose any money. When we do studies on client expectations of market returns, no client ever chooses the negative return.

Irreplaceable Capital is money which must be preserved as much as possible because if it’s not, you may suffer a major change in lifestyle, which could even change the entire financial plan.

Loss insight:

  1. Emotionally, we all feel losses more than wins.
  2. Number 1 is not only an emotional response but also a logical response. If you lose 20% of 1 million dollars or $200,000, you will have $800,000. If you only earn a 20% return on the $800,000, you will have $960,000! So you need a 25% return on your money to get back to the original 1 Million dollar investment. You need more money to get back to where you started. Feel that discomfort?

Once we have made a choice on Irreplaceable Capital, we then need to go back to our client factors. Do you need the income from the portfolio in the near future? If so, then we will choose a strategy which provides income. We may choose a combination of the tried and true dividend paying stocks, some capital appreciation and bonds. We may also incorporate more advanced investment strategies that require very experienced management and trading, and I leave that to the experts).

A general favorite of many clients is the allocation of growth and alternatives because of the potential for return and diversification. These two allocations may be a smaller part of the portfolio or a larger part, this all depends on timing. Geography can also be a factor, since income may not just be needed in dollars, in the case of our international clients. We may view domestic investments as more or less risky, and we may use global investment strategies to ensure we have diversified investments in the portfolio. They key here is educate and prepare clients on the added risk.

Time plays a critical role in developing strategies for retirement. During retirement planning sessions, you may be in the first stage of accumulation and have recently began to save and invest. In this situation, we may start with a more growth oriented strategy approach. However, this all depends on the answers to the initial client questions. Just because you recently started investing or you are a younger person, it doesn’t mean we automatically put you in a growth strategy and send you on your way.

If you are approaching retirement age, we may choose to sell growth investments. Let’s pretend we have a couple of great years in the market, we may save two years’ worth of funds needed to cover fixed living expenses and move them into an irreplaceable capital strategy to preserve your wealth in case there’s a market downturn the year you retire. It will allow us to preserve a cushion of time in which we don’t have to sell other shares at a lower price point.

When it comes to strategy selection, it is important to keep in mind the two categories in building a disciplined investment process. Combining investment management and financial planning provides us with guidance to create the right roadmap. We must focus on both the client category factors as well as the economic factors and work with each in tandem to create the best investment strategy for you.



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