Investing Needn’t Be Complicated
By leveraging a disciplined investment process, you receive transparency of information, seamless proactive service, and the trust and accountability you need to pursue your financial objectives. Using a combination of the latest technology and our team of financial professionals, we regularly monitor your portfolio to ensure you receive excellent care. While working with your advisor, you will build out your model and continually evaluate your portfolio to help you towards your goals.
How Do I Know Which Investment Strategy Makes the Most Sense for Me?
Many factors affect choosing an investment strategy. The first set of factors begins with you, our client. Our disciplined discovery process is key to understanding the right investment strategy for your specific situation. Once we have the answers from our clients, we begin to think about the second category of factors that involve the economy’s overall health.
Here are common questions we ask as we walk through the investment planning process:
What is the goal of the funds? Are they to be used now, in the future, or are they funds you would like to leave as a legacy?
What are the expectations you have for these funds when it comes to risk and reward?
What part of your portfolio do the funds we are investing in represent? What percentage do they represent in your liquid portfolio and overall portfolio?
Are the funds qualified for tax deferral?
What is your comfort level with investing, or how much investment expertise do you have?
The initial discovery process must be thorough, which is why top financial advisors will include financial planning, not just investment management, as part of the services they provide to their clients. At Nautical Star Financial, we believe all our clients should have a financial plan, which is why we view it as the skeleton of the process.
Asset Allocation Plans
Once we get to know our clients and have walked through the basics, we decide whether to create the asset allocation plan or find the spot in which the funds we will invest fit within an already established plan. To determine our path, we ask ourselves:
What is the current state of the domestic and global economy?
What is the state of the local economy?
Where are we in the business cycle?
How are specific industries and sectors performing relative to each other?
What is our team’s overall expectation of the market?
By combining the client and economic factors, we are very comfortable making asset allocation decisions. Now we can determine the answer to one essential question: need to make an allocation to irreplaceable capital?
Irreplaceable capital is the amount of money we must protect from a downturn in the market. Irreplaceable capital is different than clients not wanting to lose money; no one likes to lose any money. And while that seems obvious, there are reasons why some may overreact to investment losses.
Emotionally, we all feel losses more than wins.
Number 1 is not only an emotional response but also a logical response. If you lose 20% of $1 million, or $200,000, you will have $800,000. If you only earn a 20% return on the $800,000, you will have $960,000! So, you need a 25% return on your money to get back to the original investment. You need more money to get back to where you started. Do you feel that discomfort?
Irreplaceable capital is money that you must preserve as much as possible. If it’s not preserved, you may suffer a significant lifestyle change, which could even change the entire financial plan.
Once we choose irreplaceable capital, we then need to go back to our client factors. Do you need the income from the portfolio soon? If so, then we will choose a strategy that provides income. We may select a combination of the tried-and-true dividend-paying stocks, some capital appreciation, and bonds. We may also incorporate more advanced investment strategies that require very experienced management and trading).
Allocation of Growth and Alternative Investments
Some clients may choose an allocation of growth and alternative investments because of the potential for return and diversification.
These two allocations may be a minor part of the portfolio or a more significant part; this depends on timing. We may view domestic investments as more or less risky, and we may use global investment strategies to ensure we have diversified investments in the portfolio. The key here is to educate and prepare clients for the added risk.
Time plays a critical role in developing strategies for retirement.
During retirement planning sessions, you may be in the first stage of accumulation and have recently begun saving and investing. In this situation, we may start with a more growth-oriented strategy approach. However, this all depends on the answers to the initial client questions. Just because you recently started investing or you are a younger person, it doesn’t mean we automatically put you in a growth strategy and send you on your way.
If you are approaching retirement age, we may choose to sell growth investments.
Let’s pretend we have a couple of great years in the market; we may save two years’ worth of funds needed to cover fixed living expenses and move them into an irreplaceable capital strategy. That way, you’ll be sure to preserve your wealth in case there’s a market downturn the year you retire. Moreover, it will allow us to maintain a cushion of time in which we don’t have to sell other shares at a lower price point.
It is essential to keep in mind the two categories in building a disciplined investment process when it comes to strategy selection. Combining investment management and financial planning provides us with guidance to create the proper roadmap. We must focus on both the client category factors and the economic factors and work with each in tandem to create the best investment strategy for you.
Everyone should have a financial plan and it doesn’t have to be complicated or scary. Let’s get your plan started.