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Getting behind in your personal finances?

As your personal investment strategies begin to pay off, you may find that you need to shift the focus of your attention to managing people and concepts, not assets. The practical signs are easy to spot: You give your investments 30 minutes of attention on the weekends, your checkbook goes unbalanced, and unopened brokerage statements pile up on your desk next to other paperwork requiring signatures. It's the I'llGet-To-It Syndrome, and it signals a need for change in your investing behavior.

Say you have $250,000 in investment assets, consisting of stocks, bonds, and cash. (This figure doesn't include real estate, since many executives don't have time to properly invest in real estate, which requires on-site management, limits liquidity, and is loaded with fees that lower potential returns.) The problem for successful executives is not finding a mutual fund for $2,500 but finding an investment strategy for $250,000.

Once you move to this level in your personal finances, your investment plan needs more attention in creation, implementation, and monitoring, and you may need professional help. One rule of thumb is to hire an investment advisor as soon as you can afford to-beginning when your investments reach $100,000, although $250,000 allows for greater investment diversity. But the criteria for making prudent choices of advisors-or investments-are not in the apples-to-apples category.


Nobody ever said finding a good advisor is easy. Here are a few tips:

* All companies promise good investment work. In any company, however, whether brokerage house, bank, or financial Planner, there are individuals who have developed superior skills and experience in handling large and sophisticated portfolios. These senior people should be readily identifiable to you by their lists of client references.

* If someone claims to be an investment expert, he should be able to provide you with several names and telephone numbers of people in your investment situation. Once you have these names and references, use them. Call each person and ask about his experiences with this financial advisor and if he is satisfied with the performance. Is the advisor accessible? Can you call at any time and get the attention you need? Is the advice comprehensive, thoughtful, and pertinent? Are the fees reasonable? Has he referred others to the advisor?

* Since it's going to be your money at risk, interview the advisor very carefully. Listen closely. Is the person logical, clear, and, above all, sensible? Is there a disciplined methodology governing the investment strategy? Be sure to visit the office to get a sense of the working environment. Is it friendly, efficient, well organized, and staffed by knowledgeable support teams?

* How well can the advisor guide you through the increasingly complex tax and estate planning issues that wealth creates?

* How are you charged for the service? The best way is a flat fee charged on the value of your account. This puts you on the same side of the table as your advisor. A one-time commission is less desirable.

Examine any charges for back-up expertise, since a good advisor needs little back-up to do a good job. Also, an advisor should be able to provide an all-inclusive wrap fee to cover all services. This fee is based on a percentage of the assets under management. If costs are unbundled, the busy executive should question whether he has time to track them. A wrap fee also helps keep the advisor unbiased.

* Does the prospective advisor handle everything? This may not be the best method for you. Sometimes, the investment management should be hired out to other money managers. After all, if the advisor also manages the money, who's going to recommend firing if things don't go well? Remember, as an investor with substantial assets, you'll be relying on the advisor's advice, including whether or not you should be happy with the results.


If you retain a financial advisor, the next step is to decide on asset allocation. This requires a detailed and thorough interviewing process, in which you not only outline your financial situation, but you explore your attitudes toward risk and reward.

Here are a few investment guidelines to use in this decision:

* Plan your investment strategy to earn 10 percent per year overall.

* Beat inflation by 2 to 3 percent a year.

* Maintain an overall dividend and interest yield of 4 percent while working for capital gains.

* Limit your total potential loss in any year to 10 percent.

* Set the objective that your stocks outperform the Dow Jones Industrial Index over a complete market cycle. (A market cycle runs from bottom to bottom over two to four years.)

* Be sure your bonds beat inflation by 2 to 4 percent each year.

The higher your return assumptions, the greater the allocation toward riskier components, like common stocks. If inflation is a concern, for example, the bond portfolio may be made up of shorter-term bonds to enhance rolling over to higher interest rates, should inflation accelerate. You should review-and change, if necessary-your allocation decision every six months.

As the final step in implementing the allocation decisions, select your investments. Is stock more attractive than bonds? Is cash, though low yield, a greater risk than longer-term bonds? It's interesting to note, for instance, that up to one-third of your portfolio can be in common stocks without greatly increasing the risk of your portfolio and while simultaneously increasing return in relation to bonds. Many people are unaware of this, preferring to assume that an all-bond or CD portfolio carries less risk.

Allocating your stocks, bonds, cash, or real estate is a matter of individual preference. One popular strategy is to allocate 25 to 40 percent of your assets to common stocks, with the balance in four- to seven-year bonds and mortgages and a small amount of cash for emergencies. That allocation could vary over time, depending on your circumstances.

In addition to varying the asset allocation, you can vary the components of each asset class. Notice how the investments within Shearson Lehman's bond portfolios in retirement accounts changed over the past 10 years:

* 1980 through 1983: U.S. treasuries, agencies, Ginnie Maes

* 1984 through 1989: Certificates of deposit, 15-year FNMA mortgages

* 1990 through 1991: Collateralized mortgage obligations, zerocoupon treasuries, high-quality corporate bonds

Even though the percentage of fixed income relative to the entire portfolio hasn't changed by much, the investments within that component have changed markedly. This dynamic interaction of allocation and component selection should be your focus.

An advisor may recommend an outside money manager for your common stocks and will probably suggest a passive portfolio for your bonds. In a passive bond portfolio, various bonds are purchased and held to maturity, then rolled over. The portfolio is not traded. Sometimes, a professional manager is hired for the bond component, too.

An excellent choice for an outside manager is often the administrator of a balanced portfolio of stocks, bonds, and cash. That manager-called, appropriately enough, a balanced manager-will also adjust your asset allocation automatically.

Sometimes, investors can afford individually selected money managers to manage specific portions of the portfolio. This is superior to mutual fund management because individually managed accounts are insulated from money flows in and out by other investors.

As a part of the process, your advisor should report to you at least quarterly on the performance of your funds. While you might get monthly statements showing your holdings, you should also get separate, computer-produced, detailed evaluations of your portfolio's performance, comparing it to that of recognized market indexes, including the S&P 500 and the Dow Jones Industrial. And you shouldn't need an economics degree to understand the investment-return report.

A final note: Whatever the form or the time frame, you should keep a long-term outlook when you analyze the information contained in the report.


For many executives, the progression from investment-centered to management-centered asset management demands a real leap of faith. Nothing really prepares you for handling the complexities your financial success presents. Tracking 20 mutual funds, 20 bonds, and five or 10 money funds requires diligence.

Studies have consistently shown that upward of 80 percent of the prime movement of a typical common stock is a function of the movement of the overall market, and only 20 percent is a function of the industry or earnings of that stock. From the performance point of view, then, it's much more important to decide when to be in stocks and how much to invest, than it is to pick the individual stocks. Don't focus on each and every company, trying to create a portfolio of winners. Instead, spend that time thinking about whether you should be positioned in the stock market at all.
COPYRIGHT 1992 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Personal Financial Planning
Author:Gallea, Anthony
Publication:Financial Executive
Date:Jan 1, 1992
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