Posts Tagged ‘smart’

Smart investing is not nearly as complicated as many might lead you to believe. In fact, it really comes down to several scientific factors that just about anyone can implement in their own portfolio. And what makes smart investing even easier than a lot of people would like to believe is that, depending on the type of investment management program you choose, the investment can actually take care of itself.

Ultimately, the most basic premise behind smart investing is having a plan. We refer throughout this site to something called the asset allocation model that you will design before you invest a single cent. (You can learn more about the asset allocation model on the asset allocation section of the site). This is the most basic premise because, like the outline of a school paper, the game plan of a particular sports play, a business plan for a new start-up and these analogies can go on ad nauseum, the asset allocation model gets you thinking about the toughest questions up-front. Once you have the answers to these tough questions relating to risk, investment objective and time horizon, you can start picking the right investments to flesh out your investment plan.

This brings us to the second basic premise of smart investing: the investments themselves. While the asset allocation model will address tangible and measurable factors, it leaves out one important question: how involved do you want to be when it comes to investment management? Even if you hire a financial planner to look after all of your investment needs, you will still need to take some interest in your financial goals. However, whether you need to get involved once every quarter or once every year will depend greatly on the investments you choose. For the investor who wants greater control and flexibility in terms of cherry picking the right investments that will help achieve all of his investment goals, there will need to be greater involvement and more frequent reviews. However, this will allow the investor to pick only the most appropriate investments. The investor who wants to spend only the minimum required amount of time with his investments (and financial planner) may opt for a solution called a Fund of Funds or a pre-designed Portfolio of Funds that is very similar to a pre-determined “shopping basket” of mutual funds. This investment package will leave the investor will few (if any) options insofar as specific investments are concerned, but can be very hands-off in that the investment will rebalance itself once certain criteria are met (e.g. deviation from the asset allocation by a factor of 5% or more). Again, extremely hands-off. But the level of involvement that you choose can surely help you narrow your field of potential investments.

The key to this second basic premise is that smart investing involves sticking to the plan (normally devised in the first step – asset allocation). To be a smart investor, you will need to rebalance your portfolio and make necessary changes within the scope of your asset allocation model or within the guidelines set forth in terms of the investments you choose (e.g. if you need to deal with one bond fund, you should stay invested in that same asset class and not chase higher returns in another class). This is where the second premise comes into the picture because the type of investments you choose can mark the difference of a smart investor.