When it comes to investing, everyone should also have a strategic plan. A lot of people believe they have an investment plan that's diversified with some sort of asset allocation. However, what they really have is a collection of investments.
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This is what usually happens: The latest copy of Money magazine features a respected investing expert who recommends a large-cap stock fund. So you buy it. Then your broker calls and convinces you to buy his stock pick of the week. Or a close friend or family member tells you about a great fund, so you buy it.
The problem is, your broker and friend don't know what else you bought recently, and they don't keep track of the asset allocation of your portfolio. If you invest in the large-cap growth fund recommended in the magazine, and then buy shares of a large-cap growth stock that your broker told you about, you might get overexposed to the large-cap growth area of the market. This would increase your portfolio's risk.
Some people put different amounts of money in each new investment without good reason. You might have invested $10,000 in the fund that was featured in a magazine. Then you might have given $5,000 to your broker to buy his stock pick. Why did you put that amount of money in each investment? Because that's how much money you had to invest at that moment. It wasn't part of a strategic plan.
Many people have numerous investment accounts set up at different times. You might have changed jobs many years ago and rolled your 401(k) into an individual retirement account (IRA) that you don't pay attention to now. You might have an account at a discount broker devoted to trading stocks or exchange-traded funds (ETFs). Then you or a family member set up a 529 college savings plan after you had your first child.
What you end up with is a hodge-podge collection of investments that can be difficult to keep up with.
Think about people who collect coins or stamps. If they don't buy the best or rarest coins or stamps, they'll just have binders full of stuff that won't be worth much in the future. The point is, just because you own investments and have different investments, that's not a strategic plan. It's a collection.
Here's what you need to do: Total all of your investments, regardless of the accounts they're in, to figure out your asset allocation. If you have many accounts and don't have time to examine them, hire a financial adviser to help. Some accounts can be closed, while others can be consolidated so that you can more easily keep track of changes in asset allocation and make adjustments when needed.
It's very important to establish an investment plan that will get you from where you are now to where you want to be. If you're 25 or 35 years from retirement or some other investment goal, your plan doesn't necessarily need to be precise. Think of it like this: If you're driving from Los Angeles to New York City, do you need directions for getting around in New York City at the beginning of your trip?
But your investment plan does need to include a broad framework for putting you on the right path to your goal. When you're five or 10 years away from retirement, your investment plan will need to be more focused on how you cover those final years.
Regardless, whether you're years away from your investment goals or approaching them soon, you need a strategic plan. Otherwise, you'll just be guessing and run the risk of reaching your destination with a collection of investments that may or may not be what you want or need.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.