PERSONAL FINANCE

Financial Planning
Retirement
Insurance
Cash Flow
Investment Planning
Taxes

Investing

• Investment planning overview
• Systematic investing
• Long-term investing
• Asset Allocation Fundamentals

Investment planning overview

Almost every investor would agree that two things are critical for successful investing: First, having an effective investment strategy, and secondly, having a solid understanding of their investments. The fact there there is now more information on personal finance and investing available then ever before should make easier than ever for families, individuals, and small businesses. There are television programs, thousands of books and magazines, and thousands of Internet web sites all devoted to various aspects of personal finance. Unfortunately, the sheer quantity of data has, for many, not led to a greater understanding of their investments and financial markets, and therefore better returns, but a confusing and almost overwhelming number of financial options and choices to be made.
Making things more difficult still is how fast this information is changing. Markets are more volatile, investments seemingly go from "cold to hot" and vice versa much more quickly than before. And as the daily fluctuations of the financial markets make their way more and more into everyday news and conversations, many investors are getting caught up in the day-to-day fluctuations of their holdings. This includes many previously "long-term" investors, who are unable to watch from the sidelines and watch their holdings decline or watch lost "opportunities" in the latest high-fliers.

It seems in this environment, many individuals and families simply feel they don't have the time or resources to do the necessary research that an effective investment plan entails. Unfortunately for the investor, this often results in a hodge-podge of investments, with no coherent strategy or understanding behind it. The results of such an ineffective strategy can mean an investment portfolio that is either too risky or too defensive for ones needs, does take into account tax considerations, is too short-term or long-term for their purposes, etc.

In reality though, an individual or family can use a few resources and learn some basic investment tools to design and establish an effective investment plan. At Pace Financial Services we feel that for the investor to make effective investment decisions, an investment plan is needed. The cornerstone of the plan is knowledge of the investor's financial goals. By using these goals or objectives and going through the financial planning process, an effective investment plan can be developed. In the developing of this investment plan, the investor will know the scope of his or her investments: that is, what he or she owns. This includes the amount that should be allocated to stocks, bonds, foreign stocks, mutual funds, etc. If a mutual fund is owned, the objective and basic composition of its holdings should be understood as well as the tax consequences of their investment holdings. Additionally, a a basic understanding of how the economy and interest rates function and how changes in these may influence the financial markets and their investments should be understand.

At Pace Financial Services we believe in educating our clients on their investments, and feel that this understand will only serve to benefit our clients. We also are very aware of the time limitations of our clients. We believe that with our help, we can help our clients use the time spent on their personal finances in the most effective and financially rewarding way possible.

Below are a few simple investment strategies and definitions

Systematic investing

All the principles and ideas of the best ways to invest are meaningless unless there is a committment to saving and investing. If you have difficulty putting aside enough each year to meet your goals (for instance, 10% of your earned income) then perhaps a method of "forced" savings would be appropriate. For instance, many institutions such as banks, credit unions, and 401(k) plans, allow you to set aside a part of your paycheck directly into an investment account. Even for those without a weekly paycheck, many banks and credit unions will still allow a fixed amount to be sent to an investment account on a regular basis. Consider using the proceeds from any lump sum, such as a bonus or commission check, a tax refund, or insurance proceeds, into an investment account whether taxable or a deferred-taxation retirement program. The important thing is to "pay yourself first" by putting aside as much as possible for your future financial goals. As all successful long-term investors know, in investing, "slow and steady" wins the race.

Long-term investing

Despite all the excitement and talk about day-trading and how momentum players are influencing the market, the reality is that for almost all investors, a long-term, buy and hold strategy is still the best. Studies show again and again that those who hold their investments for the longest periods, generally have the highest returns. Although the high returns that a few fortunate short-term and momentum players may make the headlines, most such investors do much worse than if they simply bought a good index mutual fund.

For instance, a recent "Quantitative Analysis of Investor Behavior" study done by Dalbar, Inc., found that investors who bought and held stock mutual funds earned nearly 2 1/2 times that of the average investor over the past 15 years. Specifically, investors the buy-and-hold investors earned an average of 17.9% annually (roughly comparable with market averages), while the average investor earned just 7.2%. The results clearly showed how the investor who tries to "time" the market will usually: buy and sell more frequently and will sell during market corrections and buy during market tops.

Asset Allocation fundamentals

Asset allocation is simply the amount of total investments allocated to small, mid, and large-cap U.S. stocks, foreign stocks, bonds, cash, tangible assets, etc., But for most investors, this allocation will have the greatest impact on their investment results. An investment portfolio with investments in various asset classes is the cornerstone to achieving proper diversification. So why invest in different asset classes instead of a single asset class, such as in a large-cap stocks? For at least two reasons: First, one asset class will perform better than another in a particular economic and financial environment. In addition, different asset classes have different expected returns (and expected risk) than others, making one more suitable for a certain investor with a particular tolerance for risk. In addition to an investor's level of risk tolerance, the time horizon of an investor's goal (see below) will make a particular asset class more suitable than another.

Secondly, these various asset classes will not be perfectly correlated. Because of this, with a diversified investment portfolio with investments in various asset classes, for any given time period, poorly performing asset classes will be offset by higher performing asset classes. The result of such a portfolio will lead to a lower level of risk, or volatility, than would otherwise be expected for an investment portfolio with a single asset class.

So how do I put together an investment portfolio with the right allocation mix?

First, what is the specific financial goal or objective that these funds will be used for? A particular goal might be one for retirement, a child's education, a down payment for a new home, etc. Each of these individual goals will have a certain time horizon associated with them. For instance, in the prior examples, the time horizon for the goal of retirement might be 35 years, for a child's education - 15 years, for a down payment for a home might be just 3-5 years. The diferent time horizon for each of these goals will impact the proper asset allocation. For example, someone with a short time horizon (1-3 years, for example), will likely invest more in an asset class that has historically been less volatile, than an investor with a goal that has a 25 year-time horizon.

However, this does not mean that two individuals with an investment goal with the same time horizon will choose the exact same composition of assets. This is because of each investor's particular level of risk tolerance, or the amount of volatility a particular investor is willing to accept to achieve his or her goal. This level of risk tolerance is influenced by personal circumstances such as employment stability, age, other financial assets owned, the number of dependents, other financial goals, etc.

All this underscores the fact that no two investors are alike, and it is not appropriate to say that a particular stock, bond, mutual fund, etc. is "right" for somewhat just because it has good prospects or has done well in the past. The most important part of a good investment plan are investing in those types of investments or "asset classes" that are appropriate for a given family or individual depending on their particular circumstances.

This document is for information purposes only. No part of this report may be reproduced in any manner without the written permission of Pace Financial Services. The views and opinions expressed in this report are not intended to serve as specific investment or financial planning advice or recommendations, and individuals should discuss their specific financial goals and available options with a professional advisor.