When it comes to creating an investment plan, the old adage applies: "People don't plan to fail. They just fail to plan." Investment planning is no differnt. Certain factors must be taken into consideration: your current financial position, taxability, functional asset allocation, time horizon, risk capacity, and investment fees just to name a few. Here is a brief explanation for each of these areas.
Current financial position: This is a measurement of whether or not you are on track financially according to the amount of wealth you have amassed by a certain age. It takes a snapshot of where you are financially.
Taxability: Minimizing the amount of taxes you pay on your investments is key to a solid investment strategy. Many investment advisors will tell you to sell your winners and hold your losers, ignoring the impact of tax law. Selling winners creates a tax bill. Selling losers creates a tax deduction. Other ways to minimize and/or defer taxes on investments include investing in investments within an employer sponsored retirement plan such as a 401k and gifting appreciated assets.
Functional asset allocation: Using Functional Asset Allocation, your assets should be distributed across three asset classes to accomplish specific purposes:
1. Interest Earning - These types of assets consists of two broad asset types (Cash and Bonds) and serves the purpose of Capital Preservation. 2. Real Estate - Positive financial leverage through a home mortgage provides Americans with the most advantageous after-tax investment vehicle in the world. Equities - Equities are the growth engine, but subject to the most volatility. The use of non-qualified assets invested in passively managed or index funds is recommended in order to take advantage of low turnover and favorable capital gains tax rates.
Time horizon: The primary factor is portfolio time horizon because it shapes your capacity to take investment risk. The less time you have to recover from market losses, the less risk you can take.
Risk capacity: It is important to understand and take into consideration the many risks that investors face. They include but are not limited to: market risk, interest rate risk, inflation risk, etc.
Investment fees: No-load funds, index funds, or ETFs (exchange traded funds) have some of the lowest fees in the market and can be a wise choice when reducing expenses paid on investments.
If you have questions about financial planning or having us create a personalized investment plan that fits your needs, please visit www.planandact.com and start by taking your free financial assessment today.