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Guide to Prudent Investing

This three-step primer is intended to offer a fundamental understanding of the investment management process each investor must prudently govern in order to optimize their opportunities for success and avoid unnecessary risk.

Step One: Understand The Investor's Primary Role 

Investment management is best understood as a process involving specific steps and practices. Govern the process well and you could optimize the opportunity for success. Skip steps, or short-cut the process and jeopardize your opportunities.

The investor's primary role, therefore, is to ensure all aspects of the process are facilitated with the greatest care and consistency.  This begins with a fundamental understanding of the basic process. 

Step Two: Understand The Process of Investment Management

There are four universally accepted steps in the investment management process described below. Each involve a complexity of underlying practices that form an interdependent and never ending quality control cycle. When the process is managed well your program continually improves. Conversely, short-cutting practices will rapidly unravel the entire investment management process.

  1. Getting Organized: Involves analyzing and understanding your investment needs in order to define goals and identify the most effective investment strategies. This begins with an evaluation of personal investment risk tolerance and the clarification of what you money needs to do for you. Organization completes with the identification of an investment strategy that meets your personal needs/goals. 
  2. Formalization: Involves documenting your investment management process so that you can stay organized, maintain control, and effectively supervise results. A formalized investment plan is referred to as an Investment Policy Statement, or IPS. An IPS documents your profile, details your investment strategy, and outlines the process of choosing and monitoring your strategy as well as underlying investments. The ideal IPS summarizes all the roles and responsibilities of your investment management program. 
  3. Implementation: Involves the careful selection of your strategy's underlying investments. This is a complex step. Great care must be used during this stage to optimize diversification and avoid unnecessary expenses. 
  4. Monitoring: Involves the diligent tracking of results in order to maintain a high standard of care and avoid costly mistakes. This stage includes continuous evaluation of periodic performance reports, qualitative and quantitative evaluation of your strategy and underlying investments, and an annual review of your IPS to ensure all involved parties are doing their job properly.

Step Three: Manage The Process

A basic understanding of the investment management process provides the opportunity to govern it. This starts by distinguishing aspects you will personally manage and those you must outsource. In order to optimize the opportunity for success prudent investors only retain responsibilities they have the time, temperament, and training to manage properly.

The financial services industry offers several different service models to help you manage the investment process:

Brokerage Services: Brokers are employed by a firm to clarify your investment risk tolerance, time horizon, and objectives and then recommend the purchase of specific investment products. Once investment(s) are purchased a broker's job is technically finished. There is no legal obligation to monitor the recommended investments or provide ongoing support. It is important to note that when a financial advisor functions as a broker they could be only representing the interests of their brokerage firm. This potential conflict of interest is presumably mitigated by regulations requiring a broker's recommendations to be "suitable".

Investment Advisory Services: Registered Investment Advisors and Investment Advisor Representatives charge a fee to prudently manage the entire investment management process for you. When a financial advisor functions as an Investment Advisor they must adhere to a "fiduciary" standard of care.

Retirement Plan Providers: Those who participate in an employer-sponsored retirement plan (401k, 403b, 457) are provided access to investment opportunities through a Plan Provider (e.g. Fidelity, Schwab, TD Ameritrade). These platforms provide general education and guidance through online portals and telephone support. It is crucial to note that Plan Providers do not offer individual investment advice. Plan participants are expected to self-direct most if nearly all aspects of the investment management process without the benefit of individualized "advice". In my experience many plan participants fail to govern their retirement savings prudently and will need to save more and/or work longer to meet retirement savings needs. 

Modern retirement plans increasingly offer "brokerage windows" providing retirement plan participants an opportunity to directly retain comprehensive and continuous management support from their Investment Advisor. By retaining a personal professional manager participants may work-around plan limitations and meet a prudent standard of care.  (See SDBA Management

Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. Therefore, no current or prospective client should assume that future performance or any specific investment, investment strategy or product will be profitable.

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