Evidence has shown that successful investors have typically developed a
written plan identifying their financial goals. While there are no magical
formulas to make one a successful investor, a well defined investment plan can
be as easy as six simple steps:
- Outline your goals. Determine your investment goals, assess whether
you’re investing for college, retirement, a home or a combination. By
identifying your goals, an investment strategy can be structured to provide a
road map to achieve investment success.
- Know your time horizon. How long do you have until you’ll need the
money? Setting time frames for each of your goals is key because it can help
determine how long your money can be working for you. Determining a time frame
for each of your goals will guide you as you select the investment options.
- Identify your style. As you begin your journey into the world of
investing, it is important to understand what your investment style is, in other
words, what is your risk tolerance? Some investors are risk takers by nature,
while others prefer the security of cash in the bank. Most investors fall
somewhere between these extremes. They are willing to assume some risk and
understand the potential rewards associated with it. One’s style is determined
by age, personality, financial experience, and financial circumstances.
- Determine your asset allocation. Asset allocation is the way in
which you apportion money across various classes of investments, including
stocks, bonds and cash reserves. The objective is to select an allocation that
supports one’s goals at a comfortable level of risk.
- Diversify your portfolio. You can reduce the level of market risk in
investing by distributing investment dollars among different markets,
industries and sectors.
- Monitor performance. Spend some time reviewing your overall
portfolio performance. Don’t focus on one investment; rather keep your eye on
the big picture. If your portfolio begins to drift from the selected
allocation, evaluate your preference and rebalance.
Achieving your financial goals through a defined investment plan will be an
evolutionary process and success will not happen overnight.
The asset allocation decision, or how a portfolio’s investments are divided
among different asset classes, has the largest impact on overall performance of
your account. According to Markowitz’s 1990 Nobel Prize winning theory, almost
92% of your investment returns depend on how your assets are allocated among the
different classes, while only 2% is due to the actual stocks and bonds you
choose to buy. Asset allocation has a more significant affect on performance
returns than industry weighting, stock selection, market timing or any other
portfolio management decision.
Your asset allocation should reflect your current investment objective. An
investment mix that suited you when you began investing may not be appropriate
today. Just as one progresses through an evolutionary life cycle, your
investment objective will encompass a similar pattern of change. Major changes
in your personal life, financial situation and time horizon can make your
investment mix obsolete. Your investment plan is a long-term investment
commitment and should not be altered because of short-term performance or to
follow a group mentality.
The goal of diversification is to protect the value of your overall portfolio
against a decline of price in a single security and/or a market sector
downturn. When a portfolio is diversified, investable dollars spread across
different asset classes or types of securities, the different investment
alternatives tend to counterbalance one another and help reduce risk.
Diversification cannot eliminate the risk of fluctuating prices but it can
reduce overall portfolio volatility.
Cash reserves: Cash reserves are monies that you don’t need to invest or
spend immediately, yet you want this cash to be earning as much interest as
possible until the investment decision is made. Cash reserves are noted for
their liquidity, stability and in most instances, safety is a consideration.
Three of the most popular cash reserve instruments are money-market funds,
certificate of deposits and short-term Treasury Obligations.
Bonds: Bonds are debt securities, the holder of a bond is a creditor of the
issuing entity. The bond represents a loan of the issuer and the holder is
entitled to a specified rate of interest over a specific time period in addition
to the face value of the instrument at maturity. Bonds are ordinarily chosen
for the potential fixed income and capital preservation they may offer.
However, this doesn’t mean that bonds are without risk. When considering bond
investments it is important to analyze the five types of risk:
- Credit risk/quality: If the issuer is unable to pay interest and
principal when due, the bond is in default. The smaller the chance that the
issuer will go into default, the higher the bond’s quality.
- Liquidity Risk: This is the risk that, should you want to sell
your bonds before maturity, you won’t be able to find a buyer. Other things
being equal, those bonds which are less liquid typically offer potentially
higher yields to compensate the investor for the added risk.
- Interest Rate Risk: If interest rates rise, bond prices usually
decline. If interest rates decline, bond prices usually increase. Thus the
longer a bond’s maturity, the greater the impact a change in interest rates can
have on its price. If you don’t hold the bond until maturity you may experience
a gain or loss when you sell the bond.
- Prepayment Risk: Some bonds have call provisions. Prepayment risk
is the risk that the issuer of a security will repay principal prior to the
bond’s maturity date, thereby changing the expected payment schedule of the
bonds. In essence, the call provision allows the issuer to pay off the existing
bonds and than re-borrow the face value at a lower rate.
- Reinvestment Risk: During periods of declining interest rates,
investors may be forced to buy new bonds at lower, prevailing interest rates as
existing investments reach maturity and/or are called.
Stocks: Common stocks are equity securities as they represent partial
ownership in the issuing corporation. Stocks offer two components of return:
dividends and capital gain or loss. Neither the stock’s future price nor the
payment of future dividends is guaranteed. In assuming this risk, the
stockholder usually has the opportunity to earn greater investment returns than
those provided with cash reserves and bonds.
A mutual fund is an investment company that pools the money of many investors
and invests in diversified portfolios of stocks and/or bonds. The primary
advantages of a mutual fund are that they offer professional investment
management, research and record-keeping. Challenges associated in the ownership
of a mutual fund are that the investor can not control what assets are held and
it may be difficult to match individual investment objectives and philosophies
with those of a mutual fund. Mutual funds are often used if the dollar amount
to invest is limited or expertise in a special field of investing is required,
(international, alternative investments, real estate).
An ETF is a collection of securities that tracks, and is intended to represent the performance of a broad or specific segment of the market. Like index mutual funds, ETFs allow investors to track hundreds of domestic and international indexes, including the S&P 500® and the Dow Jones Wilshire 5000SM, as well as specific sectors or industries (e.g. utilities, technology or healthcare). Like individual stocks, ETFs give investors the flexibility to buy and sell on the major stock exchanges throughout the day, at the current market price.
Compounding lets you earn interest on your interest. The way your money may
grow through compounding is the greatest single benefit a long-term investment
plan can offer.
Let’s evaluate two individuals who invest on an annual basis for a specified
period of years.
Jane began investing, at age 22, $1,000 per year and earned a hypothetical 8%
growth rate on her investment. She continued to contribute every year between
the ages of 22 and 65, for a total contribution of $43,000. At age 65, she will
have $279,781.
Dick started investing, at age 32, $1,000 per year and earned a hypothetical
8% growth rate on his investment. He continued to contribute every year between
the ages of 32 and 65, for a total contribution of $33,000 (or $10,000 less than
Jane). At 65 he will have $122,346, which is approximately $157,435 less than
Jane.
Assumes $1,000 annual contribution and 8% growth rate, is not representative of any specific investment. Your plan's performance will vary.
There is no guarantee that you will be able to attain 8% annual rate of
return. This example is for illustrative purposes only.
Our Commitment to the Client: Chemical Bank’s Trust and Investment
Management Services Group philosophy is deeply rooted in the tradition of
providing personalized investment service to each client. Our mission is to
design and maintain portfolios that provide the income, growth potential, and
risk tolerances that match our clients comfort levels and exceeds their
financial expectations.
Our Staff: At Chemical Bank’s Trust and Investment Management Services Group
we believe high-quality service begins with a well trained diverse staff. Our
team consists of forty-nine professionals adept in a number of financial and
investment disciplines. Our staff of professionals have been managing
investment portfolios for over forty-five years.
Our Experience: Our staff is comprised of seasoned professionals with
experience in the fields of banking, trust and investment services. We are
recognized in our field as leaders in estate planning, employee benefits, trust
administration and portfolio management.
Our Objectivity: At Chemical Bank’s Trust and Investment Services Group our
investment team employs an “open architecture” approach to investing your
funds. An open architecture system adapts to your needs, rather than forcing
you to adopt the limitations of the financial institution. Our process of
investment analysis ensures that your portfolio includes the most suitable
investments based on your goals.
Our Discipline: In delivering investment management services, our goal is to
provide clients with a comprehensive personalized investment program that
considers sound economic financial principles and adheres to the Prudent
Investor Rule. Our decision-making process will focus principally on long-term
investment results within the confines of our client’s risk tolerance.
Our Independence: As a regionally owned financial institution our overriding
mission is to serve the financial needs of each client. Successful completion
of our mission supports the communities we serve and ultimately enhances
shareholder value.
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