Step 2 – Develop Your Personal Investment Plan
Developing your investment plan takes time and consideration. At Linden Thomas and Company, we work hard to assist you in establishing a customized plan designed specifically around your financial goals. As your independent financial advisors, we take a realistic and practical approach in developing your plan, and once established, do everything in our power to keep you focused. This means maintaining a disciplined approach to achieving your goals.
The Importance of Asset Allocation & Diversification
The goal of Linden Thomas and Company is to enable each of our clients to allocate their assets based upon their specific goals. Together we will build a sound asset allocation strategy which incorporates an understanding of the various asset classes available, their risk and reward characteristics, and how you can combine them to create a portfolio that is appropriate for your unique needs and goals.
It is important to understand that asset allocation is not about market timing, or shifting investments in a constant pursuit of the highest returns. Rather, asset allocation is a disciplined, long-term strategy for investing in various asset classes based on one’s investment goals, time horizon, and tolerance for risk. Studies have shown that a significant portion of an investment portfolio’s performance over time can be explained by asset allocation.1 We believe that the decisions you make as to the asset classes in which you will invest, and how you will allocate your assets among those asset classes, are likely to have a significant impact on the investment results you achieve over time. Keep in mind, however, that asset allocation cannot eliminate fluctuating prices or periods of market volatility.
Markets fluctuate and asset classes do not always move together. It is for this reason that investors should consider a diversified mix of investments across a wide array of asset classes including small, mid, and large cap growth and value equities, as well as fixed income securities. The prices of mid-cap and small company stocks are generally more volatile than large company stocks. They often involve higher risks because mid-cap and small companies may lack management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
We believe a well-developed, thoughtful asset allocation strategy can help investors limit exposure to unnecessary risk, maximize their results, and ultimately meet their goals in the long run. Furthermore, we believe that by diversifying the assets that one has available to invest, there is a greater chance of achieving one’s investment goals, without the need to constantly react to changing market conditions.
1 Based on a study of large pension plan portfolios by Brinson, Singer and Beebower, ” Determinants of Portfolio Performance,” Financial Analysts Journal, May/June 1991.
Managing Financial Risk
Risk implies the possibility of loss, and it is important to understand this prior to investing your assets. In fact, addressing risk during the initial phases of establishing your investment plan may be one of the most important things you do. It is important to determine not only your ability to take on risk, but also your willingness to do so. “Riskless” investments do not exist because the future value of all investments is uncertain. Therefore, recognizing the type of investor you are will help you to build a portfolio of investments that have the potential to help you achieve your financial goals, while also allowing you to be comfortable with the investment choices you make.
Generally speaking, the level of risk associated with a particular investment is directly related to the expected return on that investment. The more risk associated with a particular investment, the higher the return an investor should expect. Likewise, the greater the potential return, the higher the potential risk. In order to reach your goals, some amount of risk is necessary. Therefore, understanding all aspects of your risk tolerance is integral to the planning and investing process.
Investment Costs – Develop Your Personal Investment Plan
Whatever an investor’s long-term financial goals and risk profile, the overriding objective is to achieve the best possible returns from a portfolio of investments. Investors are often unaware of the impact fees and expenses can have on the potential growth of their long-term assets. Fees such as investment management fees, transaction costs, wrap fees, loads or other sales charges, and 12b1 fees are all very common to an investment program; however, these fees should not be exorbitant. Overall portfolio returns can be significantly impacted by such costs, and otherwise good performance can be eroded away by fees and expenses. This is why it is very important for investors to pay close attention to all the fees charged by the company with whom they entrust their savings and investments.