How to "GRASP" the Investment Process

When new clients come to me for help in their implementation of an investment plan, I go through five major steps. Whether you intend to design and manage your own portfolio - or hire me as your personal consultant, it would help you to know the key steps for building a successful investment plan. The acronym G•R•A•S•P is a good way to remember the process:

  • G - Goal identification
  • R - Risk assessment
  • A - Asset allocation
  • S - Select investments
  • P - Performance monitoring

Goal Identification - Your goals should drive the investment plan. Accordingly, the plan should be tailored to your specific financial and lifestyle goals. In order to construct a plan to accomplish them, you must specifically identify the most important goals. Defining the time needed is an important element of the goal setting process, as different types of investments would be used depending upon the amount of time available to achieve the goal.

Consider the following analogy. Let’s say you want to see the live show of “The Lion King”. If it is playing in downtown Detroit you most likely would drive there in your car, but if it’s playing in Toronto, you might take the train. However, if you want to see the Broadway show in New York, you would probably fly there. The distance/time dictates the vehicle used to get there.

When investing, equity mutual funds are good vehicles for long-term goals such as retirement because they provide growth. Even so, they are too volatile for short to intermediate goals, where stability of principal is essential. For near term objectives, stable investments should be used, such as money market funds, CDs, or bond funds. Therefore, you must match the investment vehicle with the timeframe of the goal.

Risk Assessment – The next step is identifying the amount of risk that you are willing to accept. Too much risk may cause you to panic at the first sign of trouble and make bad decisions, while too little risk may prevent you from achieving your goals. In assessing the amount of risk for your portfolio, you must understand that all investments have risk. For example, conservative investments, such as bank CDs, offer stability. They are risky for long-term goals, such as retirement, because they will not keep up with the rising costs of living. The key is to take a balanced approach and accept a little bit of several types of risk.

Asset Allocation - Diversification is the cornerstone of any successful investment plan. By using a combination of different types of investments, you can reduce the volatility (risk) of your portfolio without sacrificing the rate of return. Asset allocation is the process of diversifying the portfolio by dividing among unique asset classes to arrive at the best mix for your particular goals and risk tolerance. Experts say that asset allocation is even more important than which specific investments are used. That’s why the selection of asset classes should be done before selecting individual investments.

Select Investments – Once you have determined the portfolio allocation, the next step is to select assets that best represent each category. Index funds and exchange-traded funds (ETFs) are the ideal vehicles to get you efficiently to your destination. They are low-cost, extremely diversified, liquid, and convenient to use and provide perfect balance (no overlap of securities). There are many discount brokerage firms that allow you to purchase index funds and ETFs for each category in order to customize your portfolio.

Performance Monitoring – The last step is to review the portfolio and make adjustments if necessary to insure that it stays consistent with your investment plan. Investments should be reviewed periodically to make sure that they are performing as expected. In addition, rebalancing is necessary to keep the portfolio in-line with the intended allocation (risk profile). Of course, if your goals or risk tolerance change, then you should repeat the first two steps and adjust the portfolio accordingly. It is a good idea to perform a casual review of your account statements about quarterly; however, changes are generally not required more frequently than once per year.

This five-step methodology gives you a framework to develop and maintain a portfolio entirely on your own, but I don’t want to make it sound too easy. To establish the best risk profile, it is helpful to know the various kinds of risk, such as interest rate risk, default risk, inflation risk, market volatility, business (unsystematic) risk, and currency risk. It also takes some knowledge and judgment to know which asset classes (and how much of each) belong in your portfolio and which can be left out. Even though index funds and ETFs are easy to understand and purchase, there are hundreds from which to choose.

Many people don’t have the time or inclination to undertake the process themselves. For this reason, I specialize in helping people create a customized investment plan that is easy to maintain using the process outlined above. Not only will this give you a superior portfolio than if you hired a full-service investment manager or broker, you will also remain in full in control and save yourself gobs of money. Therefore, if you would like to self-direct your portfolio in the coming New Year - and receive some help along the way - I would be happy to be your personal consultant to help you GRASP the potential of your investments.