News & Articles

Five Simple Steps for a Successful Long-Term Investment Strategy

January 01, 2007

by R. Patricia Grenier, CFP®, CSA

A successful financial life doesn't happen by itself or without a strategy.  Many of us spend more time planning for our vacation than for our lifestyle.

It doesn't have to be difficult or complicated.  There are 5 basic steps I follow with my clients and use as a roadmap for their financial success.

1. Define Your Goals.  Each and every one of us is different.  We have different likes and dislikes, we are at a different stage in life, and our family situations differ.  As a result, we aspire to a certain lifestyle that is different from our friends, family, neighbors or co-workers.  Therefore, our goals will be different.
   
   It is important that we have well defined goals.  They may be short, intermediate, or long-term in time frame.  Or, you may have goals you want to reach at different time periods.  It is also important for you and your spouse or life partner to discuss these goals and come to an agreement on how you want to lead your life and the lifestyle you will share.  It is easier to reach these goals if you both are working with the same goals in mind.
   
2. Assess Your Risk Tolerance. There are many different types of risks we face.  They range from loss of principal, credit or default risk, interest rate risk, opportunity loss, market risk and the biggest risk I believe most of us face is the risk that we are going to outlive our monies.  This is the only time I can think of that living to a ripe old age could be detrimental.  It is a fact: Living longer costs more!  We need to determine how much of these risks we are willing to accept and tolerate. Once we know that, we can move on to the next step.
   
   Keep in mind that risk can be minimized by offsetting investments but it will never go away completely.  If we want to use our monies as efficiently as possible than you have to be willing to accept some level of risk.  The fact that you choose to keep our monies in a shoebox carries its own level of risk.  The important point to remember even if it seems contradictory is that ADDING RISK ACTUALLY MINIMIZES THE OVERALL RISK OF OUR PORTFOLIO.
   
3. Diversify and Develop.  Diversify where you place your monies and develop an asset allocation strategy that takes into consideration your risk tolerance time frame and goals.  There is an appropriate mix of savings, stocks, bonds, real estate, commodities and international investments for all of us.  Studies suggest that 91.5% of our success comes from how well we allocate our resources VS the actual investments themselves.  A study conducted by Brinson, Singer & Beehover that was published in Financial Analyst Journal, revealed that long-term portfolio success is really driven by the asset allocation decisions, not by market timing or which securities are selected to be bought or sold.
   
   That being said, it is important to consider traditional and non-traditional investments when developing your plan.  The traditional investments should provide steady growth while the non-traditional investments should be viewed to provide the extra return in the portfolio.  In investment terms we call it the "Alpha."  That alpha will certainly play a big role in preserving your portfolios when you experience the inevitable downturn in the markets that occur every few years.
   
4. Implement Your Plan. Once you have decided what your asset allocation should be, place your monies accordingly to put your plan into action.  Pay close attention to the volatility of your investment choices.  High volatility, (especially on the downside); can be disastrous to your success as you might never be able to recoup a large decline in your monies.  A 50% decline in your portfolio means it has to appreciate by at least 100% to return to its pre-decline state.
   
5. Review and Rebalance.  Periodically review your plan to update it for any changes in your life that may impact your plan.
   
   In addition, rebalance your allocation so that it agrees with your strategy. This will force you to sell high and buy low, thus locking in gains and taking advantage of weaknesses in the marketplace.  This sounds like a simple strategy, but it is counter to what most people do and want to do - Buy High and Sell Low.
   
   There is no better time than the present to start planning for your financial security and peace of mind.  These 5-simple steps will help pave the way.

Pat Grenier is a General Partner with BRP/Grenier Financial Services in Springfield, MA. Securities offered through Cadaret, Grant and Co., Inc., Member FINRA/SIPC. BRP/Grenier and Cadaret, Grant and Co., Inc. are separate entities.

Pat can be contacted by phone at (413) 736-6712, or email her at pat@brpgrenier.com

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