Best investment plan hinges on your goals, not complex strategy

Your Funds

Your Money

October 31, 2006|By Chasrles Jaffe | Chasrles Jaffe,MarketWatch

NASHVILLE, Tenn. -- At the Financial Planning Association's annual convention here, more than 3,000 financial advisers saw seminars on a wide range of investment and money-management strategies.

They mingled with more than 200 exhibitors who were hawking everything from exchange-traded funds to mutual funds and hedge fund strategies.

An ordinary consumer set loose in the place would logically jump to the conclusion that investing is complex, especially if you want to do it right.

But the right message to take away is much different.

It's that there is no one right way to invest in funds.

Fund investors can gravitate toward exchange-traded funds, but it's not like they'll miss their goals if they stay put. They can diversify with a fund that acts like a hedge fund, or thar invests in one asset or in managed futures, but there's no imperative to move money that way.

In fact, many advisers in the rooms made compelling cases for keeping things simple and straightforward, even while acknowledging that some clients feel they're not getting their money's worth if there is nothing complex in the mix.

The key for consumers is to understand that reaching financial goals is more about finding a strategy that you can live with than it is finding the best available fund. It's about sleeping well at night, believing your money is properly taken care of.

There are suggestions and guidelines, but few absolutes. An investor's strategy should reflect personal preferences, risk tolerances, desire for simplicity or complexity and more.

For example, many advisers suggest rebalancing a portfolio every quarter or year. Rebalancing involves culling your winners and pouring money into laggards so you're your portfolio allocations stay true to your plan.

But William P. Bengen, author of Conserving Client Portfolios During Retirement, noted that frequency of re-balancing has a lot of impact on returns.

Letting your winners run and re-balancing less frequently has, historically, goosed returns by a few percentage points over time, Bengen said.

While that seems to encourage less frequent portfolio tweaks, he acknowledged that it can increase a portfolio's volatility, which some investors will find scary.

The idea, according to Bengen, is not to look at which re-balancing plan is right, but to focus on what is right for you.

That philosophy applies to most investment ideas.

Diversification, for example, is an absolute necessity, but financial advisers disagree on just what makes a "diversified portfolio." I asked more than two dozen planners how many funds they thought the typical investor "needed," and most pegged the number between six and 15.

At the same time, many said their average client owns many more funds, sometimes owing to participation in various retirement savings plans, investment in sectors or niche markets to spice things up, and so on.

Problem portfolios, most felt, are the ones with too few issues to truly be diversified or too many funds to manage with ease. Anything in the middle, however, seems to be acceptable, provided that it meets the investor's expectations.

Similarly, asset allocation often sounds like an advanced science, but advisers at the conference recognized that placing money into certain asset classes is more a matter of taste than necessity.

Where someone with high-risk tolerance and a global outlook might want to invest in emerging markets or take a flyer on funds investing in specific developing countries or industries, conservative savers might want to keep their money tethered to the domestic market or in large-cap, big-name funds.

None of this serves to make the so-called "investment rules" invalid. Instead, it forces the individual - and their adviser if they have one - to create a personal roadmap, to say, "Here's where I am today, there's where I want to get in the future; what's the best route from here to there?"

The answer will combine all of the relevant factors, from how much someone saves to how much risk they can stomach, to when they want to retire and how much they'll need to make that happen on time.

The "right" answer is the one that allows the individual to complete the course, even if it is not "best" when viewed by an outsider looking for "optimal portfolio construction," or by someone who might greedily have taken more risk to get greater rewards.

The many styles and approaches on display in Nashville - and used in practice by advisers all over the country - serve as a reminder that investing is a contest that can have many winners. You don't need to cross the finish line first, or with the most money, to be a champion, you simply need to reach your goals to your own satisfaction.

jaffe@marketwatch.com

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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