Our investment process starts with your goals and dreams. What exactly are you trying to accomplish with your wealth? What is the timeframe that you wish to achieve these goals? Setting clear and detailed financial goals is absolutely crucial for creating an optimum investment strategy. For some people, this can be done within a few hours. For others, it takes months of meetings to clarify and delineate their goals.
Appetite for Risk
The next step is to get an understanding of your appetite for investment risk. Each investment that you choose has an expected level of volatility associated with it. By volatility, what we are talking about is changes in its market value. For example, an aggressive investment that has a lot of volatility might fluctuate in value by 40 percent or more, in a given year. A conservative investment with low volatility may only fluctuate a percent or two.
Your willingness to accept investment risk is the level of volatility that you can stomach, before you decide to get out of the investment. Naturally, we are more concerned about the downside volatility. At what point, do you start losing sleep?
We also evaluate your financial capacity to endure losses in your portfolio. If you have a large portfolio, you may have more of a capacity for loss. For example, with a large enough portfolio, you may still be able to achieve your financial goals, regardless of declines. Along the same lines, if your timeframe is longer than 10 years, you could potentially afford to be more aggressive with your investments. With a longer timeframe, you will have more time to recover from declines.
Once we have identified your financial goals and risk tolerance, we can determine which combination of asset classes will provide the highest expected rate of return, given your risk tolerance. An asset class is simply a group of investments that have similar risk and return characteristics. For example, broad asset classes include stocks , bonds, and cash equivalents.
Next, we select appropriate investment vehicles and strategies to gain exposure to your targeted allocation. Generally, we will recommend utilizing a combination of publicly-traded stocks, bonds, and exchange-traded funds. This helps minimize costs and keeps things simple.