Building Life Plans, One Client at a Time

Putting the Horse Before the Cart

In this post, rather than talk about what you invest your money in, let’s discuss instead how to build a framework for your investments.

Building an investment portfolio before you’ve developed a financial plan is typically not the wisest course. First, know what you want, then figure out how to build the framework you need to reach your goals.

It’s imperative that you factor in your entire financial picture when you make investment decisions. Look at your investments in the context of all your other holdings. Consider every type of account you have—including brokerage accounts, 401(k)s, IRAs, and trusts. Understand what your needs are for the short term, medium term, and long term.

Investment HorizonYou will need liquid funds to help you deal with unexpected contingencies. We recommend you set aside as much as 5% to 10% of your investments in a short-term, conservative vehicle, such as a money market fund.

The balance of your investable assets should be focused on the longer term. However, we recommend that some of these funds be in medium-term investments to accommodate expenses such as vacations, new cars, and college tuition.

Asset allocation is key. Not only should your money be invested across different types of investments (stocks, bonds, commodities, etc.), but within those asset classes you need diversification. Don’t invest solely in the S&P 500, the Dow Jones Industrial Average, or some other index—or mutual fund—no matter how well it’s done on the past. Allocate your funds across large cap and small cap, domestic and international, growth and value.

Similarly, your bond investments should represent different maturities, be spread across geographies, and be backed by different types of entities (e.g., Treasury, municipal, and corporate bonds). Below-investment-grade bonds make sense in some portfolios, but we don’t recommend that you take on unnecessary risk in search of high yields.

Take advantage of tax-deferred vehicles such as 401(k)s, IRAs, and 529 plans. If your company offers an employer match in your 401(k) plan, be sure to maximize the benefit. If you’re a small business owner, profit-sharing and defined benefit plans can reduce your tax burden significantly. Municipal bonds and similar investments can provide tax-free income.

Fees are another important consideration. If you want exposure to small-cap equities, you can gain it through a mutual fund. However, that mutual fund will charge much higher fees than an exchange traded fund (ETF) that would offer you similar exposure. Also consider the fees that you are paying for investment management and trading.

Some types of investments can sound very compelling because the overhead you’re paying is hard to discern. For instance, you may need consistent income and be considering an annuity with a generous yield. It may be too good to be true, and you may need help in determining hidden charges, upfront fees, surrender charges, and other possible costs.

If you have any questions, please call or e-mail us at (925) 365-1533 or

Tags: , , , , , , , , , ,

Accretive Wealth