Smart401k Blog

Once again the Super Bowl is upon us and my beloved Kansas City Chiefs are watching from home.  But I have hope.  Recently the organization secured two of the top coordinators available — Charlie Weis will be the new offensive coordinator and Romeo Crennel will be the new defensive coordinator.  These are the same individuals that contributed to the Patriots’ three Super Bowl victories from 2001-2004.  For the first time in a decade, I feel like there is a strategy in place and it’s designed to get the Chiefs to the ultimate destination – a Super Bowl victory.

I’m a firm believer in the power of a vision because it creates inspiration and the framework for strategic planning.  Just as I feel that the Chiefs now have a vision and are starting to take steps to achieve that vision, I believe this approach is necessary in creating a successful investment strategy.  Too often I hear financial experts talk about their investment picks, training the average investor to think of investing in terms of what should I buy/sell vs. what goals do I have, and how do I best get there.

While investment selection is an important component of investment planning, there are a few steps that must be addressed first:

Create your vision. What are you saving for, college, retirement or something else?  Is it to fund your whole retirement or supplement other income you’ll receive?  What will your education costs be and when will you need to start using the money?  Just as a football program needs to realize where they want to be and when, it’s important to step back and understand what you want your investments to do for you.

Understand yourself as an investor. If there’s one thing I’ve learned about watching football over the years, it’s that the most successful teams have an identity.  Some prefer to play conservatively and manage the clock, while others attempt to score as quickly as possible and use more high-risk, high-reward plays.  This is due in part to preference, but also to what they feel are their strengths and weaknesses.  As an investor, you should evaluate how long you have to invest the money (time horizon) and how comfortable you are with market volatility (risk tolerance).   Try to identify any other circumstances that may influence how you invest, such as accessibility to your investments (liquidity needs).  Realize that there is a risk/return tradeoff.  Investments with the highest potential for long-term return generally come with the highest amount of risk.

Determine your asset allocation. At this point, a football team knows (1) where they want to go, and (2) generally what type of team they are.  Next, they start planning how they think they can best win the next game.  For you, that means determining what mix of investments is most suitable.  For someone close to retirement and more conservative, maybe it means 70% in lower-risk investments such as money market and bond funds and 30% in stock-based investments such as domestic equity and international funds.  On the other hand, someone in their 30s who doesn’t mind short-term volatility may want a mix of 80% stock-based and 20% lower-risk investments.

Select your investments. At this point in the process, you know what allocation mix is needed for your portfolio; the next decision should be which investments fit with your allocation mix and give you the greatest chance for success.  We look for certain criteria when choosing investments, including:  fund manager’s track record, performance vs. others in the same category, consistent returns, amount of risk each fund takes and expenses.  Because I know that I want to have 15% in international or 20% in large-company value exposure, I just need to select which funds I want to invest in within each of those areas.  Going back to my football analogy, a coach has many different types of plays they can run.  Based on their predefined game plan, they have the ability to select how they want to execute those to best defeat their opponent.

Monitor and evaluate your performance. In football, it’s pretty easy to gauge your performance —your win/loss record.  Evaluating your portfolio’s performance is a little more difficult.  A quick way to identify how your portfolio is performing is your personal rate of return.  This is typically found on your quarterly statement or on your retirement plan website.  Obviously, you want to see a positive return, but more importantly, you should compare your personal rate of return to how the overall market (such as the S&P 500 index) performed to give some perspective on what the investing environment was like during that time.  If you have a conservative investment strategy, you should ideally see your account lose less than the market in downturns; and while maybe not what’d you initially expect, it’s typical to see a conservative portfolio gain less when the market is going up.  Moderate to aggressive strategies will typically see performance similar to or more volatile than that of the overall market.  In addition, you want to periodically evaluate how each of your investments perform in relation to others in the same category.  If a fund significantly underperforms or outperforms in different types of markets, you should understand why (e.g. the fund takes a higher-risk approach).

Make adjustments. Football teams frequently make changes, either to their game plans or personnel, in order to stay competitive.  Just the same, any good investment strategy needs adjustments based on changes to your situation, changes in economic or market conditions and as funds fall in and out of favor.  It’s important that the changes are reflective of your overall, long-term vision and not the result of short-term, emotional decisions.

Will the Chiefs’ plan be successful?  Time will tell, but I feel improvement is in their near future.  While doing the steps above won’t guarantee your success, we believe your chances increase greatly if you adhere to a disciplined and long-term investment strategy.  If you find yourself getting stuck in any of these steps, please contact our advisers at info@smart401k.com or 877.627.8401.

Best of luck in 2010 and beyond.

Kevin Jaegers, Senior Investment Adviser

This entry was posted on Tuesday, January 26th, 2010 at 9:10 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.