Investment management is the traditional core of wealth management or financial planning as practiced today. Most financial planners concentrate more on investment management than on any other portion of the wealth management or financial planning process. They also earn most of their money from investment management.
Asset allocation should lead the conversation
We believe that investment management conversations should always start with a conversation about asset allocation. Research has shown that slightly more than 90% of your investment return will be determined by the allocation you choose for your investments. Approximately 4% of your return is achieved by the actual selection of stocks and bonds. (Source: Brinson, Hood & Beebower, Financial Analysts Journal, 1986; Brinson, Singer & Beebower, Financial Analysts Journal. 1991)
Concentrate on volatility
The next portion of your investment strategy should concentrate on the projected volatility of your portfolio. We believe that managing downside risk is much more important than concentrating on upside potential.
If you have $1,000 and have a 100% gain in your investment, you will now have $2,000. If you take $2,000 and have a 50% reduction in value, you will once again have $1,000. For this reason we believe that concentrating on a strategy that helps minimize downside risk is important for the long-term health of your portfolio.
Core and Satellite Investing
The third area of concentration for investment management should be on developing a core and satellite strategy. The core investments you have typically are stocks and bonds. Here you will concentrate on using cost effective investment vehicles such as index funds or exchange traded funds. We believe that in the core section of managing your investments passive strategies provide more long-term value than active investment management. Passive management strategies attempt to replicate the performance of a specific benchmark, usually an index.
Satellite investment strategies will include those stock sectors where active management can add value. Active management strategies attempt to exceed the performance of a benchmark or index. We believe the satellite sector of your investments should include alternative investments that are designed to provide regular returns no matter what happens in the broad market.
The goal of a core – satellite investment strategy is to provide you with positive inflation adjusted returns that have lower than average volatility.
Understand the movement to passive income
The fourth part of an investment strategy for owners of private business is to understand the impact of moving from an active income situation where you got a paycheck from your business to one where a major portion of your income will now come from the returns your investments provide. We often suggest that business owners have some active income in the portfolio, often from the investment real estate from which you run your business. You may decide to sell your business for many reasons. We often suggest that you keep ownership of the real estate you owned while running the business. The income from this real estate can become important in meeting cash flow needs after you sell your business.
Selected Tools:
- Asset Allocation Strategies
- Passive Investment Strategies
- Hedge Funds
- Direct Real Estate
Articles
How to Hire a Financial Adviser
The Wealth Optimization Process
The above tools, techniques and resources are listed as examples. Your Stage2 Advisor will work with you to identify the right strategies for you depending on your specific life goals and financial goals.