The Planning Process
Three critical factors need to be considered:
- investment objectives and return expectations
- risk tolerance
- risk-reward considerations for each asset class
Good planning begins with each client’s unique goals and objectives combined with risk tolerance and return expectations.
Methodology
We believe the proper construction of an investment portfolio should not only include a discussion of your risk tolerance and financial objectives at the outset, but should recognize other important factors:
- Market fundamentals matter.
- Diversification is critical.
- Risk is as important as the potential return. Risk should be defined as the possibility of permanent loss.
- Investors will behave irrationally and as a result, markets will too. Emotions govern the market.
- Market bubbles exist and should be anticipated and recognized.
Implementation of the Plan
What is the time horizon for your money?
Which asset classes should be considered to help reach your goals?
What will be the asset class mix at the outset? What percentage is appropriate per asset class given the risk vs. reward of each asset class? How is each asset class currently priced relative to historical valuations?
Which assets will be purchased within each asset class? ETFs, individual securities or some combination of both?
Risk, the potential return, expenses and taxes should always be considered.
How to Manage Cash Flows
- For investors living off a portfolio in retirement, or to supplement other income, it’s critical to manage cash flow to meet expenses.
- A review of current and ongoing expenses is helpful.
- A review of cash flow projections of a portfolio is important to match income needs with expenses.
- An understanding of income and potential capital gains is important to meeting ongoing cash-flow needs. While tapping principal to meet your expenses is generally considered unattractive, there are times when it can be appropriate and acceptable.