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Green Peak Advisors

“By failing to prepare, you are preparing to fail” ~ Benjamin Franklin

The purpose of the blog is two-fold – (1) be informative and draw interest to investing in general and (2) hopefully introduce some practical investment options to investigate.

Before getting to the “how”, it is critical to analyze the “why”. One needs to take a step back and assess the goal/s for this particular investment and see how it fits into your overall portfolio. These days, no one would just hop into the car hoping to drive to Eilat without first checking Waze, understanding the different route options, taking the time to assess each different path (sometimes the shortest way isn’t always the best one!), and finally selecting the actual route to take.

It may seem obvious, but I would say an easy way to get started is to look at the following three basic parameters. Only after careful analysis of these issues can one come up with a real strategy for investment.

  1.  Goal of the investment
  2. Time horizon for the investment
  3. Personal risk appetite\tolerance

Let me elaborate, and hopefully simplify it.

Investment Goal

Plain and simple – ask yourself what purpose does this investment serve? Is it for retirement? Is it for a college fund for my kids? Is it just general savings? Is it meant to hedge another part of my portfolio? Will there be withdrawals from the account along the way? What is most important to me – Growth? Capital preservation? Income?

A 70-year-old retiree has a completely different set of goals than a 24-year-old college grad, so your portfolio should be positioned to reflect your goals. Take the time here to fully understand your investment end-goal.

Time Horizon

This is critical. Determining what the time-frame is for your investment has a major impact on what to invest in, what the asset allocation should be, how to weight the different underlying investments, as well as what your return expectations should be.

For example, there is a big difference between putting away money for a child’s college education ten years down the road and saving for a down-payment on a home within the next two years. The risk that one can afford to take on an investment with a long-term horizon is completely different than for an investment with a short-term horizon.

Liquidity of the investment is also affected by time horizon. If you are planning to “invest and forget about it” and an interesting opportunity arises that would require locking up the money for a significant amount of time – perhaps you can consider it. On the other hand, if you know you will need the funds within a certain time frame, it probably should remain in highly liquid assets.

Overall asset allocation (from a macro level – how the portfolio should be divided between asset classes) is significantly impacted by time horizon. As a test, you can begin the account opening process at a robo-adviser account and play around with the time horizon settings and see how it changes the model. The asset allocation model for a portfolio with a 25-year horizon will be very different than one with a 5-year horizon.

Personal Risk Appetite\Tolerance

Risk appetite is a very individual thing, something only you can determine for yourself. For example, if you are the type of person who would get “stressed and concerned” over big swings in your portfolio’s performance, then perhaps you should consider investing more cautiously and taking less risk. You want to avoid being in a situation whereby you will make the wrong investment decision “in the moment” when your portfolio is down.\I would say one of the main reasons why money managers exist to begin with, is to remove the psychological trappings we face when we manage our own money. A classic example is the “selling at the bottom” phenomenon when fear kicks in, and markets are volatile. Good money managers exhibit a certain level of investing discipline which hopefully translates into granting better piece of mind to their clients and better overall performance on a portfolio level.

Only you can determine how much volatility you can stomach. I would start by asking, “If my portfolio went down by XX% in a year, what would my reaction be?” Would I sell? Do nothing? Double down? This should give a sense of the level of risk you can handle.

If you tend to be risk averse, consider a more conservative asset allocation model. If you aren’t concerned as much about short/mid-term volatility and this is consistent with other factors (overall goals, time horizon, etc.) consider taking additional risk and adjusting to a more aggressive asset allocation.

The Bottom Line

In conclusion, we all want to get to the bottom line – where should we park our money? That being said, we sometimes forget to take a step back and really analyze the “why” behind the investment. This is a critical step in the overall process.

I have tried to touch upon a few of the basic parameters to think about before going ahead and executing an investment strategy. The planning that goes into investing is as important as the actual investment. There are always additional factors to consider – such as liquidity, net-worth and overall context of the investment, inflation, hedging, diversification, tax, and macro risks, just to name a few. In the coming posts, I look forward to touching on some of these concepts. In addition, please feel free to leave a comment and ask your questions here!

Talk to the experts at Green Peak Advisors about practical investment options – contact us today!