Smart Investing Pays Back

By Gary Fry
April 2008

Building a strategic portfolio is a complex process even for seasoned investors. Add to this a domestic recession and a sliding U.S. dollar, and the roadmap of how and where to invest may seem even more daunting.  Don’t panic. To determine the best course of action, identify goals and establish a strategy for obtaining them.  Sound investing is an ongoing process and it starts with a close, thorough evaluation of your financial portfolio and personal financial goals. 

Examine Your Finances
Smart investors know their finances inside and out.  Take some time to understand your financial situation.  What are your assets?  What are your liabilities?  What are your day-to-day financial needs?  A thorough assessment of both sides of your balance sheet will help you understand your overall financial situation, which is the first step in strategic investing.  

Plot Your Future
Most successful investors know what they want in life and then work toward achieving those goals.  Think about what you want your future to look like.  Do you want a bigger house or a second home in your favorite vacation destination?  Or do you want to help your children and grandchildren pay for college?  Do you want to use your wealth to leave a legacy in your community?  Plotting your future will set the groundwork for the investment portfolio that will help you successfully reach those goals.

Stay Diversified
A balanced, diversified financial strategy should include elements of at least three main asset classes – stocks, bonds and cash. For many investors, cash is the most overlooked portion of their portfolio.  A portfolio comprised of both stocks and bonds can even out your returns, making it easier to stay invested during various market environments. But diversification that includes a cash position can help minimize the effects of market and interest rate volatility on a person’s net worth.  

Proper diversification can also reduce your concentration in securities, sectors or styles, helping create a better balance between low- and high-performing assets.  Determine the best integrated approach for your portfolio, as it is crucial to retaining stability and flexibility in today’s volatile markets.

Plan Your Retirement Strategy
Retirement planning is an often neglected investment strategy, as many people procrastinate saving for retirement.  But if you make retirement savings a priority early in your life, you can watch your nest egg compound over 40-50 years, thereby watching it turn into something significant.  To develop a strategy for this phase of your life, explore several important retirement savings vehicles, including 401(k)s and IRAs. 

Be Disciplined
Stocks, bonds and other investments should not be seen as “get-rich-quick” strategies.  Strategic investors know that patience and a long-term vision can help them achieve their overall financial goals.  They also know that the market ebbs and flows and that riding out market fluctuations is one of the keys to successful investing.  Remain disciplined in your approach to investing.

Leave a Legacy
Philanthropy is not only a way to leave a legacy in your family or community – it is an opportunity to enhance your financial portfolio. Sophisticated investors use charitable giving as a strategic tool to minimize their tax liabilities. If you want to incorporate strategic philanthropic initiatives in your portfolio, determine which philanthropic vehicles best complement your financial portfolio and strategy.

Consult a Financial Advisor
From an investment perspective, it’s crucial to meet with a financial advisor to assess the impact surprise events can have on your portfolio, and shift your investment strategy if necessary. Your financial advisor can help alleviate and anticipate significant financial burdens that arise with life changes.  When choosing a financial advisor, consider a professional from a reputable firm and one with an appropriate level of experience working with people in similar life and financial situations.

Timing is Everything
There is no better time to plan your future than the present.  By starting now – no matter what stage of life you are in – taking charge of your finances and examining your portfolio will reap great rewards for years to come.  And remember, investing is a process.  Success cannot be achieved overnight.  Stay focused on your long-term vision and you will likely achieve all your financial goals and dreams.

Gary Fry is a financial advisor at Merrill Lynch in Dallas, Texas.