In the last few posts, I’ve covered the importance of investment beliefs and also discussed a few surprising things I’ve learned in nearly 15 years of managing investments. In this post, I want to cover at a high level, the importance of an investment process.

Investment Advisor

While the process underlying investment management can be extremely detailed, at its core there are a few key questions a process should answer and then return to again and again. Those questions are as follows:

What are your investment needs?

As wealth managers, we take a holistic view of client needs, and that view is indispensable in determining investment parameters. These parameters can include the long-term return you need to meet your financial goals, although your willingness to pursue more aggressive investments might be tempered by your risk tolerance which is defined as willingness and ability to accept risk. For some, focusing on tax efficiency is key, while others might be more concerned with having stable income producing investments in a taxable brokerage account where they can readily access them.

The CFA Institute, of which we are members, recommends putting together an Investment Policy Statement which outlines your overall investing needs and investing strategy (you’ll find more information here).  The value of an IPS is that it provides a long-term focus and it clearly delineates what your aims are in constructing your investment portfolio.

What is Your Investment Universe?

You define your investment universe by applying your investment beliefs to the investments that are available to you. Thus, investments that aren’t available to the public or that have minimums that are too high would be excluded. You would also exclude, for example, actively managed mutual funds if your belief was that active management does not add value over the long term. Clearly defining your investment universe and needs isn’t just helpful in the initial construction of your portfolio – it can also help you vet opportunities that arise over time like investment in real estate or private investments.

What Does the Portfolio Look Like as a Whole?

Once you have determined your investment needs and chosen your universe, you need to construct a diversified portfolio. There is a good bit of information on how to go about that, but once it is built, make sure the portfolio meets your needs and you understand its characteristics. Is the return at or above what is needed for you to meet your financial goals, and is the riskiness in line with your risk tolerance? How much taxable income is the portfolio likely to produce, and do you have enough in liquid investments to meet your needs? Understanding these and other questions is key in confirming that the portfolio you’ve built is likely to meet your needs.

How Much Work is Needed to Maintain this Portfolio?

Once your portfolio is constructed, make sure you are willing to put in the work to maintain it so that it continues to meet your needs. A portfolio that consists of individual stocks and bonds will typically take more work to maintain than one consisting of mutual funds and ETFs. Further, although diversification is critical, the greater the number of investments you have, the more time will be required. Finally, even the simplest unmanaged portfolios will need to be diversified from time-to-time to ensure it continues to meet your risk and return needs. If you don’t want to or can’t put in the time necessary, consider using a managed portfolio or working with an investment advisor.

Do you have more questions you’d like to discuss with a fee-only financial advisor? Contact us today.