January 2009 - Personal Planning

The New Year is a popular time for making resolutions, usually about positive and productive changes to general behavior; and resolutions can apply to personal financial goals and objectives, too. In this regard, we would like to review the importance of developing and maintaining a long-term investment plan. When we establish a client relationship, we determine a client’s goals and risk tolerance in order to design a portfolio that meets each individual’s needs. This is presented as a proposal that details our portfolio management plan and becomes the framework for ongoing management of the investment portfolio. In essence, we create a “road map” that will assist us in getting you to your desired long-term investment objective.

This “road map” is commonly referred to as an Investment Plan and is set down in writing in an Investment Policy Statement (IPS), and should be reviewed periodically or whenever personal circumstances change. Not only does an Investment Plan help guide us to a thoughtful and successful beginning, it also provides the discipline to stay on course in the future. In other words, it provides a consistent resolve from year to year. Just like other sensible New Year’s resolutions, an Investment Plan makes it more likely that you will remain committed year after year, and eliminates the temptation to set short-term, but unrealistic, goals.

Benjamin Graham, who is considered by many to be the father of security analysis, referred to the stock market as an emotional character named Mr. Market. Some days Mr. Market gets really enthusiastic and pays almost any price for a stock. Other days Mr. Market gets depressed and practically gives away stock at fire sale prices. Of course, there is no "omnipotent being" determining the level of stock prices. Mr. Market is everyone who participates in the market. Yet on any given day only a few participants may be buying or selling securities and setting prices and most people track performance based on the short-term actions of these few. It is possible that these price-setting participants are consumed by the madness of crowds, like frenzied auction participants. Following and relying on short-term market prices, whether up or down, hands over control of the investment decision-making process to an irrational force.

If you stick to an Investment Plan, you will be more likely to remain fully invested during periods of market turmoil and to benefit from market recoveries. You will also rebalance prudently during such period s and avoid the temptation to chase short-term market performance or the “new, new thing,” or to make poorly-timed big bets in either direction. Following a well-balanced and realistic Investment Plan gets you in the “game” and keeps you there. It enables you to manage, in a disciplined way, the inevitable effects that fear and greed have on decision-making.

Why is it important to remain fully invested? Investors who attempt to time the market run the risk of missing periods of exceptional returns. For example, a hypothetical $1,000 investment in stocks as measured by the S&P500 Index at the beginning of 1970 grew to $54,120 by year-end 2007. However, that same $1,000 investment would have grown to less than half that amount, or only $25,220, had it not included the 15 best single trading days of this 456 month period. Only fifteen days! It would have grown to only $16,995 had the 25 best single days been missed. Furthermore, $1,000 invested in cash over the same 38 year period would have resulted in an ending value of only $9,015. As the saying goes, it is not market-timing that really matters but rather time in the market.

Now that times are difficult, investors should renew their commitment to the long-term discipline that our investment programs are designed to provide. Designing a portfolio that enables our clients to remain fully invested is one of the most important services that we can provide. The New Year is a good time to re-examine your personal circumstances and confirm that your own Investment Plan is current.