And why shouldn’t you hold this belief? This industry has spent years as well as millions upon millions of dollars to convince you that the road to riches is paved by investors knowing which stock to buy when. Pick the right stock for the right price, and sell after it peaks out but before you lose. In theory, this concept makes perfect sense. And yet your personal investment experience tells you reality is different than theory.

Online brokerage houses make it easy for you to trade stocks, bonds, mutual funds and EFT’s. You’re haunted by the realization that if you had purchased Microsoft, Apple, Amazon or gold at the correct time, you’d be financially set, and that other’s have done exactly that. Of course those stocks have experienced rapid growth and rapid losses, during their long rise to stardom. So, would you really have held on to finally reap the rewards that 20/20 hindsight affords us? Remember the dark days of Amazon when it dropped from $106 to $10 and took another 10 years to reach that high again? How about Apple, which traded at $3.07 in October 1984 and just $9.80 a share 10-years later? Remember when it looked as though Apple was going to fail until Microsoft came to its rescue with its $150 million dollar investment. Even Microsoft was struggling with a massive antitrust lawsuit at the time. Would you have held on then? Would you have ignored the media frenzy and the pundits who were screaming to get out?
Average investor vs. passive equity fund

In fact, an annual study done by Dalbar, an investment industry research firm, measuring the equity investment returns for the average equity mutual fund (an institution) as compared to the average investor (you) returns over the same 20-year period has consistently shown that the average investor underperforms by a substantial margin. Why? What can explain why you as the average investor gets such terrible performance? There is only one possibility. Investor behavior.

For example, according to Dalbar, for the 20-year period ending in 2007, the average annualized passive investment return, in this case using the S&P 500 index, was 11.81 percent while average investor (you) return was 4.48 percent. If the average investor had simply purchased the S&P 500 index in 1987 and held it, their average annualized returns would have been approximately 7 percent greater. While, investors are concerning themselves with the management fees of 1 percent, or whether to purchase a less expensive index fund vs. an actively managed fund, or which fund was a top performer over the previous 12 months, 7 percent of their returns were being left on the table due to poor investor behavior.
How much exactly does this behavioral mistake cost? If you had invested $10,000 in 1987 and received the average investor return that was the result of investor behavior including selection and timing, concerns about the presidential election, recession fears and the market collapse of 2001 of 4.48 percent, your $10,000 would have grown to $24,025. However, if you had simply purchased the S&P 500 and held if through thick and thin the original $10,000 would be worth $77,907!

Depending on the 20-year period we look at, the difference, or more accurately, the alpha, between average equity mutual fund return and average investor return varies, but consistently the average investor looses. In 2011 the average investor return was -5.73 percent compared to the S&P 500’s return of +2.1 percent.

As your financial consultant focusing on the modification of your investment behaviors I had helped you close the gap on your returns, in 2011 alone, from -5.73 percent to just break even, wouldn’t I have earned my 1 percent fee many times over.

It turns out my job is not merely to find great investments, but to create great investors. Trying to out smart the markets in search of alpha, is a fool’s errand that is most likely going to hurt you – my client.
However, working together to develop an elegant yet simple investment plan, that considers your specific short and long-term goals, works to reduce inefficiencies and increases returns. This work combined with modified behaviors will certainly ensure that you outperform your neighbors. Not to mention, help to ensure you reach your investment goals.

In addition to that, however, as your Financial Consultant, I also explore opportunities for you to be more efficient with your home mortgages, leasing and loan programs, rental property financing, life insurances, medical insurances, and personal debt. Doesn’t this sound like a recipe for true wealth creation?

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long-term financial plans and provides low cost investment management services.

TO LEARN MORE:
707-996-9664
www.magnum-financial.com
sbossio@magnum-financial.com

Now, 30 years later we are able to look at the results of this shift in responsibility as the first wave as the affected employees begin to retire. For those who were lucky enough to hold a job consistently for 30 years or more, they have faired slightly better than those who switched jobs or were laid off for some period of time.

Today, many retirees still have some sort of pension program that can help to close the gap between their need and their own resources. Specifically, those that worked as teachers, police and fire personnel, unionized labor and employees at all levels of government are still able to draw a pension. And regardless of often-sited information, these pension benefits weren’t free. Most of these employees were required to help fund their plans via automatic payroll deductions, which were matched by their employers.

Today, employers, especially government employers, are under pressure to eliminate or severely cut back pension benefits to new employees. Clearly, the responsibility for planning, funding and managing ones retirement is only going to increase.
Are most individuals savvy enough and is it a priority to plan their own retirement? Are we even awake to the problem and ready to meet the challenge?

The Center for Retirement Research at Boston College reported that based on a 2009 median income of $87,700 and a post-retirement need of 85 percent ($74,545) most households fall short. In fact, based on the median current 401(k) value of $149,000, those 60-62 years old without a pension, but receiving social security, would be able to provide just 59.2 percent of their need.

I’m not one to panic or to suggest that the sky is falling, but the facts are clear. We have a problem and it’s not going away.

Retirement planning is more important than ever, and as consumers we need to understand the options available to us, determine our needs, make a plan for both savings and investments and implement our strategy.

Although the problem is the same, each situation is unique. There are both opportunities and challenges to consider. Some people still have pensions that can and will subsidize their efforts; some have investments in businesses that might be sold to provide a nest egg or a stream of income. Others will downsize real estate holdings in an effort to generate capital. Others will live on rental income. And many will continue to work even part time. Whatever the situation, its important to have a realistic strategy, to understand the pitfalls and to protect the assets you currently have, including your ability to earn income.

Once a strategy is developed, its then time to determine how to reach the goals you’ve developed. What savings rate is needed to sufficiently fund a 401(k)? How can debt be eliminated within a business and what would a transition strategy look like? How much debt should one carry on their personal residence and their rental properties and what can be done now to help meet the long term retirement income goals? Can insurance play a role in the overall plan?

At this point we need to determine an investment program. What kind of investor are you? Are you a saver, a speculator or an investor? How can we leverage the market in a way that can help us to meet those goals and fits our investment tolerance?

Finally, we need to implement our strategy. There is never a better time than today to do so. Never! Even if the beginning is slow and limited. The point is to start.

There are many unknowns in the world today. But one thing is for sure; at some point most of us are going to want to stop working for money. We may want to pursue volunteer opportunities, travel, spend time with our children and grandchildren and or just be in charge of our daily schedule, completely in charge. Whatever ones motivation is, we can also be sure that our new life will require money.

Retirement planning is much more than just how much to save and at what rate of return. Retirement planning is about planning for the next stage of ones life. If you haven’t done any retirement planning, there’s no time like now. The process should start with clearly articulated goals, an accounting of your current situation and the development of recommendations to meet your goals. If you’re well on your way, a review of your current situation, especially after the last few years of financial challenges is in order.

At Magnum Financial we employ state of the art software that allows us to control all the variables. Our clients require and deserve more than a simple linear equation to accurately project a realistic picture and to determine which strategies will meet their goals. We then provide a detailed list of specific recommendations our clients can implement immediately.

The burden to meet retirement income needs is truly upon each and every one of us.
Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long-term financial plans and provides investment management services.

I participate, as do you all, in the use of digital technology. Technology that allows us to access an unimaginable amount of information. However, these technologies don’t concern themselves with delivering quality information but are simply tools to access a quantity of information, ever changing in order to keep us interested.

Consumers are gathering vast amounts of information and have the ability to act upon that information quickly and easily. Activities like finding directions via your Smartphone are well supported via this model, however, determining which medical treatment is best for you in a given situation is not. My concern stems from my experience with families and their financial decisions. Financial decisions have been simplified to such an extent that we process our decisions with no more planning that we do to find a new restaurant, get movie tickets or pay a bill. We spend most of our time thinking about which investments to make and little time thinking about how those investments will help us, specifically.
Financial planning and investment planning is most effective when your advisor spends time delving into the complexities of the situation, creating strategies that align goals and client values. The actual investment, stock, bond, mutual fund, annuity, REIT or ETF, is only a small part of the investment decision, and as a planner I sometimes find I am fighting an uphill battle against the quick easy and simplistic information we are bombarded with every day.

I am often asked about specific strategies; “where would you invest $50,000?” “Should I buy this bond?” “We’re at the bottom, is now the time to buy a rental property? “

Are people still satisfied with a one-size fits all model? My answer must be proceeded with a discussion about the client’s goals, their needs both short and long term, and a suggestion that until I have some clarification as to their values and goals I can’t make a recommendation for specific investments. In order for a recommendation to be an appropriate investment, it must align with one or more goals a client may have. And since no two clients have the same goals and are in the same situation, well that makes it nearly impossible to provide a quick solution. However, when time is taken to articulate a client’s goals, assess their resources, review their current holdings and then spell out a plan of attack, the appropriate investment decisions become clear and self-evident. This is why I often suggest planning first. To provide a framework from which to make future decisions, a vessel if you will, that provides form to the process.

If you are not interested in working through a plan here is a basic strategy that can be your vessel.

These generalities are just a start.

Work to build a solid income stream.

Protect your ability to work and your income stream.

Spend less than you earn.

Build an emergency fund.

Save additional money for the future.

Determine a hierarchy of needs for your savings (New home, college, new business, travel, retirement, medical costs, family needs).

Solidify a long-term investment program.

If resources allow look for additional investment options.

Review your results and accomplishments – be brutally honest.

Modify your plans as necessary.

You can think of these steps as part of a pyramid of success. Building your financial house from the bottom up.

It’s important to note that planning is far more complex than represented here. Each area has many facets to consider, long and short term considerations, sustainability of ones programs, safety, risk tolerances, resources and the financial instruments that can serve you.

So what about Facebook? I have been asked if it’s a buy. First, the purchase of Facebook stocks lands squarely in the top tier of the pyramid. If you have planned for and implemented, in a sustainable fashion, the bottom 2/3 of the pyramid you might consider an investment in Facebook. Then you need to do your own due diligence in order to understand the risks and rewards of that investment. Did you know Facebook lost 7 million participants last year? I know that most Facebook buyers haven’t done the work on their financial foundations, the bottom third of the pyramid, and are simply hoping to get a piece of the next Google or Apple. This is what we call speculation, partly driven by the machines we call the internet and television. However, as exciting as Facebook may be, be aware of the realities, often ignored in the reporting found in today’s media and don’t be afraid to be left out.
Your financial future is far too important to proceed without a clear well articulated plan of attack. Yes, you might miss out on a few IPO success stories, but I guarantee you’ll also miss out on the higher percentage of IPO failures.

If you have questions you would like answered here or privately, call or email to the contact information below.

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long-term financial plans and provides investment management services.

www.magnum-financial.com
sbossio@magnum-financial.com

I was conversing with a friend recently when he mentioned a great stock he had purchased two years ago. He was proud to tell me that the stock price had doubled and that he was hoping it would continue to rise. I congratulated him and then asked him: Why don’t you sell? His response was that he didn’t want to pay the capital gains. I understood, and then questioned whether an 80 percent return after capital gains taxes were paid wasn’t good enough, because there is always a risk that the stock will fall. He said he hadn’t really thought about it. I then asked him when he would sell if the stock started to falter. Again, he didn’t have an answer, he just hadn’t considered it.

By now my friend was becoming annoyed with me, after all, he had simply wanted to tell me about his good fortune and I was making a whole big case out of it. What I had demonstrated was that he had no plan. He was simply focused on that particular stock’s appreciation and might soon find himself focused on that same stock’s loss. Without a clear plan he had no objective basis for making the decisions he now needed to make. Ultimately, he’ll be left with making these important financial decisions based on fear and greed.

My friend is not unique. Many new clients first concern is with the rate of return they can expect from their investments. How much will you earn by following my recommendations? It is this focus on rates of return that is so misdirected. For example, if you have just one year to live and one million dollars in the bank, does it matter what rate of return you get? On the flip side, if you have 40 years to live and $100,000 in the bank can you afford to lose 30 percent of your assets if the market turns down?

Let me ask you this: Would you build a house without a plan? I think it’s fair to say that the actual process of building a house is made easier once the hard work of planning has been completed. Many important decisions are made long before the first 2×4 is cut. Each of these decisions helps to direct the project, and to ensure the design meets the goals of the owner. You also determine the materials required, the types of systems to be incorporated and the potential costs. But most importantly, these plans provide the builder with a direction and a means to determine if he is on track. Without the architectural drawings how would a builder know if he is building the correct house?

As an investor you must ask yourself if you can afford to build the wrong financial house. I often say that financial planning is for everyone, but is even more valuable to those that are not the wealthiest. A proper plan can help you to avoid costly financial mistakes as well as reveal opportunities you may not have considered.

The profession of finance is complex and for many overwhelming. Naturally, it easier to ignore the issue of finance completely. The problem with this strategy, however, lies in your future. Just as you wouldn’t build a house without an architect, you shouldn’t build your financial future without a professional. Locate a financial professional and spend some time planning and building your own financial house.

“For every complicated problem there is an answer that is short, simple and wrong.” M.L. Mencken

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial of Sonoma. He works with individuals in the creation of their long term financial plans and provides low cost investment management services. 707-996-9664, magnum-financial.com

The end of the year is near and provides an opportunity to reflect upon the past and to plan for the future.

Not since the Great Depression has so many Americans experienced the type of financial unrest that began in 2008 and still lingers today. The entire middle class is feeling pinched and has grown weary. American’s all want the good old days back, remember 2003-2006? However, the economic drivers that defined the wealth of the middle class just haven’t improved. Unemployment continues at record levels, housing prices remain in the dumps and capital markets continue to be challenging. Looking ahead we expect State and Federal governments to continue cutting costs in order to balance their budgets and so the pain seems likely to increase. The American economy and the American way of life are three years into what may be a 5 or 10 year course correction and we may never again experience the financial boon we saw in the late 90’s and early 21st century. So, how do we cope?

It should be comforting for us to know today’s challenges are not totally unique. The Great Depression was marked by struggle, poverty and rationing of food and supplies. Then came the Second World War and Vietnam. Oil embargos of the 70’s, runaway inflation of the 80’s. The late 80’s and early 90’s brought a new sense of efficiency to American business as massive layoffs swept America by storm. Many people experienced the loss of high paying jobs, their big houses and fancy cars soon followed. We began to see a shift as corporate America re-defined its responsibilities to its workers; pension funds were replaced with 401(k)’s and job security was no longer related to performance, union relevance shriveled. Many were unprepared for the financial shift and struggled to survive in this ‘new” America. It soon became clear that change was the new normal. Workers could expect to have multiple jobs in their working lives, and many would have multiple careers. These changes all require new thinking about wealth and preparation for the future. Retirement planning became a household word and a personal challenge. The individual was, more than ever before in history, alone.

Regardless of where you began on this historical timeline there are lessons we can learn by considering a long term perspective while developing financial plans for today’s challenges. One trick is to eliminate emotionally driven strategies from our decision making process. We must also recognize that there are areas in our lives where we have control and areas where we don’t. We need to focus upon those things we can control and push aside those we can’t. When we do so, the path becomes quite clear and the fear of the moment is reduced.

Increasing savings rates and reducing debts will allow us to be better positioned when challenges and opportunities arise. Recognizing the need to be a flexible worker, developing strengths in multiple fields, industries or specialties will insulate us from radical change in industries as technology and advancements turn today’s industries into the buggy whips of the past. We must develop a financial strategy that includes long-term investments within the markets available to us today, based on realistic expectations and common sense. We must create flexibility within our financial lives and understand the power of a dollar. When and where to spend our dollars in support our personal goals. We should clearly define our needs as opposed to our wants and develop goals and strategies in support of each. We will benefit from taking time to evaluate our current situation and articulate a new future; fully realizing the future is likely to continue to be one of rapid political and economic change.

This re-evaluation allows us to develop a new vision for our future and ourselves. Our ability to focus on and act in support of our new focus is the job we must all take up. Taking time today to redefine your needs and goals in light of financial difficulty will position you to be that much more successful when the economy once again begins to grow. We can use this time, not to hide, but to develop new habits for spending, saving, sharing, helping, and supporting ourselves and those we love. We can and should be proactive.

My hope for everyone is that you’ll take the time to develop a plan for 2012 and beyond. A plan rich with family, friends, community. A plan that feeds your soul, that engages you in activity that is important and sustaining. A plan that will provide financial security regardless of the challenges that you will surely face.
Wishing you happy holidays and a successful New Year.

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long-term financial plans and provides investment management services. To learn more, call 996-9664, visit magnum-financial.com or email Steve at sbossio@magnum-financial.com.

My last article was printed just as the debt ceiling crisis was nearing a conclusion. Investors had already experienced a 7.5 percent drop in the S&P 500 during the previous 30 days. It was my hope that once the crisis was behind us, the markets would rebound. Boy, was I wrong. Over the following week markets continued to retreat ultimately dropping 20 percent on the S&P 500 as August 10th came to a close.

So as my emotions tried to hijack my intellectual processes, I knew it was time to revisit the strategies I use to help my clients reach financial freedom. I reminded myself of the research and study I’ve done regarding markets. I looked again at the long-term trends of markets. I once again familiarized myself with the notion that markets suffer 20 percent drops quite regularly, in fact, about every five years. I reminded myself that over time markets
go up. I reviewed my various allocations, and reviewed the costs. I revisited clients’ financial plans and asked myself if the plans and recommendations were still appropriate, and if I’d make the same recommendations today. Ultimately, I couldn’t, nor can I now, justify recommending any other strategy when striving for financial success but a solid plan and investment in a well-diversified portfolio designed to meet the specific needs of my clients. So, no matter how deep my wish to protect my clients from the volatility of the markets, I know that I can’t. Market volatility is simply part of the process.

My mantra to my clients and to my readers is to make a plan and stick with it. In my mind, there is little likelihood you will reach your goals without a clear picture of where you want to go. Businesses use vision statements to help them stay on track and individuals need plans, especially because it’s so easy to stray off course. Don’t allow yourself to get sidetracked worrying about today’s market returns, you’ll be better off if you consider the long term effect of inflation on our purchasing power, the probability and challenges of living longer in retirement, and what you can do to control medical costs or plan for what will be a major financial burden in your golden years. Focusing on the long term, which is much more predictable than the short term, will help you with your fear. Long term planning will also help to eliminate financial inefficiencies, a symptom of a lack of clarity.

Many clients come to me with a mix of investments and a slew of different financial products and strategies that individually might have made sense, but taken as a whole are disconnected, inefficient and problematic. Annuities, life insurance, CD’s, stocks, 401(k), IRA’s both Roth and Traditional, mortgages and even timeshares; purchased from a salesman who has no interest in the big picture, just the commission to be made when each deal is closed.
Often missing in this process is a clear connection or understanding on the part of the client about how each financial product can help them reach financial freedom. These connections are made clear in the planning process.

I understand people are reluctant to invest in financial planning. Planning is seen as an expensive and unnecessary burden, but the truth is an investment in a clearly articulated financial plan allows my clients to get clear about the long term and to eliminate inefficiencies in their financial lives. The relative usefulness of a given financial product can then be determined with deep questioning n relationship to your goals.

For example, refinancing your mortgage from a 30-year to a 15-year mortgage will certainly save interest over the life of the loan, but how does that new payment impact ones ability to save for retirement or college expenses? Is the new payment a stretch and how secure is the income stream that pays that mortgage? What’s the possibility that household income may suffer a 10-20-30 percent drop? What would be the consequence of that in relationship to your new mortgage? Does having your home paid off really make sense for you? Why and how do you know?

Take the time now to develop a long-term financial plan, one that takes into account your goals, aspirations and resources. Get clear on where you want to go and what resources you can allocate to that end. And then do it. You won’t be sorry and I guarantee you’ll be a lot more likely to stay your course while keeping fear and inefficiencies at bay.

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long term financial plans and provides low cost investment management services.

TO LEARN MORE:
707-996-9664
www.magnum-financial.com
sbossio@magnum-financial.com

The Federal government is spending more money every year than it brings in, so in order to keep current with its obligations, the government takes on additional debt. Not unlike you or I using our credit cards to buy food. If we continued to do this never paying off the balance, we’ll certainly reach our credit limit. So, we either ask for more credit (increase the debt ceiling), cut our spending or increase our income. Here federal government is no different from us, except that millions of people depend upon its expenditures in order to survive. Programs like social security and Medicare come to mind.

I agree that we need to look at and improve our financial situation, but to do so in this way under these economically challenging times is poor policy; it’s not how I envision my government working. Frankly, it’s time to clean house, both of them!

In the meantime investors are living with increased market volatility and decline, circumstances that are as unnecessary as they are unnerving. The uncertainty over the debt ceiling is caused completely by our leaders and their saber rattling. It’s not bad enough that people are worried about their homes, their jobs and the future. Our elected leaders have created a crisis when one didn’t exist during a time of sustained economic turmoil. It seems that the new political strategy is to create chaos to force change at the expense of innocent bystanders and that frankly, these politicians either don’t care or don’t understand the risk.
I just read Michael Lewis’s The Big Short. The book describes what happened to the housing market in clear terms. The players are well documented and their motivations were clear; profit. The only problem was that the bankers didn’t understand the risks they were taking. Even as the market began to soften and fall many companies continued on, blind to the potential downside of all their exotic financial instruments. They never in their wildest dreams understood that losses could and would reach 40 percent or more (their models had used a mere 5 percent!) The scary part, is that these “experts” are and were supposed to know better.
It’s one thing for an individual to misunderstand the risks of a stock pick, commodity or penny stock trade. It’s quite another for brokers to pretend to understand the risks and ask you to follow their advice.

I earn my living by helping others take advantage of the inevitable rise of the markets. I am convinced that when properly invested, when there is a plan and the plan is followed, investing in the growth of great companies should be a cornerstone of a solid investment plan. Historically, we know that the markets have ups and downs and yet if you had been investing over the past 50 years, you’d be pleased with the results.

Even now, I don’t know of a better way for the individual investor to share in the economic engines of the world other than to have a well-diversified portfolio of mutual funds. Visit my website at www.magnum-financial.com and click on “resources.” There you’ll find a sample moderate allocation you can put to work today. Then continue to save a little bit every month no matter what.

Thirty years from now, when the current group of politicians are long forgotten, when the housing bubble is long over, when the U.S. government is still paying its bills you’ll be happy that you started early and just kept moving forward, one day at a time.

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long term financial plans and provides low cost investment management services.

TO LEARN MORE:
707-996-9664
www.magnum-financial.com
sbossio@magnum-financial.com

We have always planted our garden in early May and by late June are beginning to enjoy the fruits of that labor: tomatoes, zucchini, beans, fresh basil, eggplant and cucumber. This year, not so much. Yes, we enjoyed some fresh yellow zucchini last weekend, but the tomatoes are stunted, the basil is just beginning to show signs of growth and the eggplant, well partly due to the slugs, has been less than stellar. I must need to change what I’m doing, plant later, add soil amendments, water more, leave out more beer for the slugs. Clearly, I need to adapt my historically successful farming techniques due to this new information. 

Right now I feel like I need to make a change, the garden is terrible, but I’m uncomfortable with all of this. What if the plants don’t do well with my changes, what if my new techniques aren’t any better, what if, just when I need that basil it turns cold and the plant dies, what if the future isn’t anything like the recent past?

The number one concern I hear from clients and potential clients is: What if I don’t have enough money when I need it, what if the market turns against me, like it is now and did in 2008? 

The S&P 500 has had its share of ups and downs over the years. Every investor since the Great Depression has carried with them the thought of losing it all. Remember that since the Great Depression, markets have had a 25 percent correction (reduction) about every five years, but if you had invested $10,000 in the DOW in 1928, you’d be just fine. Really. Your planting would have borne fruit, even after the unpredictable had taken its toll.

Why then is there so much concern? Well, during the first 19 trading days of this month the S&P experienced seven days with changes of greater that one percent, either plus or minus. In June 2010, there were nine days of fluctuations of greater than one percent, plus or minus. In June 2003, seven days, June 1995 just three and June 1985 just two. The frequency of these market swings seems to be on the rise and I, for one, have my theories about what is causing this, and no it isn’t specifically the Greek troubles, oil prices or violence in Syria.

Interestingly, even with the increased volatility, the amplitude is fairly consistent on the average, just about 1.4 percent. So, based on my very limited market research, investors really are experiencing more days of hot and cold, more rain and sunshine and frankly, it’s making us queasy. These kinds of events cause us to be concerned about our investment accounts especially as the pundits predict the sky is falling and thus feed our fears 24 hours a day. All the while, ignoring all the noise, the market continues its long, consistent march forward and up. 

Yes, this has been a poor season for tomatoes so far, and I suspect I will experience many more poor seasons before I leave this earth. I also suspect, I’ll experience many good growing seasons filled with the abundance of fresh homegrown produce. I have faith that the long term prospects of growing fresh vegetables are good and although I am concerned, I try to understand that I’m currently experiencing one difficult year, not a lifetime of difficulty. 

In my practice I stress the need for long term investment planning. I help clients develop a plan that are based on the best historical information along with a few client specific assumptions thrown in, to best ensure they are able to live a long financially worry free life. The market plays a part in this, providing opportunities for investors to compound their efforts but, of course, only when we keep our focus on the long term. 

Dow in 1928: 240. Dow in 2011: 12,043. Now how can you argue with that? 
Please go and enjoy your Fourth of July weekend, temperatures should be in the 80’s, and then, on Tuesday begin the process of planning your long term investment strategy. It’s never too early to start. 

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long term financial plans and provides low cost investment management services Contact Steve at 996.9664 or sbossio@magnum-financial.com.

Considering the big picture, I have to agree that if each investor took these variables into account and completed a simple online allocation, individual investment results would probably improve. I know implementing a proper investment allocation and complete diversification strategy can reduce your downside risk, and thereby increase your total return. However, I maintain that although understanding these variables is necessary, it is by no means enough. Investing is more than an allocation strategy. Investing requires a plan and the proper behavior to put your plan to work.

I understand this is a fine distinction but when taken to heart, can help an investor think more like an institutional investor. Thinking long term, reducing risk, and making investment decisions based on a strategy rather than emotion.

Asset Allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. Notice I am not talking about the actual investments here. The purpose of asset allocation is to reduce risk. The ideal asset allocation differs based on each investors specific situation. For example: A 30 year old investor may decide that a allocation strategy including 80% stocks, 19% bonds and 1% cash is appropriate. That investor’s 62 year old boss may, however, determine that her allocation should be just 40% stocks, 45% bonds and 15% cash. Each allocation may be perfectly suited to each investor, but it’s likely the total returns will not be the same.

Diversification is a risk management technique that mixes a wide variety of investments within an allocation strategy. It’s designed to minimize the impact of any one security on overall portfolio performance. Diversification, in fact, is possibly the greatest way to reduce your risk. The ability to diversify our portfolio has been simplified with the development of mutual funds which by design offer greater diversification for the average investor. Purchasing just one mutual fund provides a certain level of diversification, but falls short of our need for asset allocation. This includes indexed funds. Similarly purchasing one stock and one bond leaving a few dollars in cash is a very simple allocation strategy, but it also falls short of proper diversification.

In order to develop a proper portfolio we need to incorporate both strategies. So although the terms asset allocation and diversification are often used interchangeably, we need to understand they are very different strategies. Once we understand this distinction at a fundamental level we can begin to develop more complex strategies which may provide additional risk protection.

I believe as a competent financial planner, I must, to the best of my ability protect my clients from risk whenever possible. At Magnum Financial I develop portfolios that are well allocated and well diversified. I then look at the benefits of multiple investment vehicles as a means to further reduce one or more potential risks. For example, I may recommend minimizing the use of a 401(k), opting instead to fund a Roth IRA or cash value life insurance contract. I may recommend using an annuity to shelter a portion of your income from taxation.

Investing is an active process, but not a process of stock or fund picking for the highest return. Proper allocation and diversification must include a plan for your broad holdings, the specific investments and the vehicles that hold the money. Your long term success at reducing risk is then determined by your process of review and monitoring of your strategies and investments.

Whether you’re just starting out or near retirement no one vehicle will protect you from all the associated investment risks. But with a mix of properly diversified vehicles, diversification of your investments and a well developed asset allocation, I can help to reduce additional risks not normally considered in simplified do it yourself investment strategies.

Diversification and Asset Allocation do not guarantee against loss; these methods are used to help manage risk.

On May 25, 1961, President Kennedy asked Congress to support his vision of landing an American on the moon by the end of the decade and returning him safely to the earth. In his address, the President articulated the sacrifice and costs, as well as the reality of needing resources already committed to other activities. He stressed the need to commit to this endeavor as a nation.

While President Kennedy recognized and expressed the need for planning in order to meet this vision, he clearly understood that planning alone was not enough; there needed to be a commitment to the effort that would be required. The President said:

“We have never specified long-range goals on an urgent time schedule, or managed our resources and our time so as to insure their fulfillment . . . . For while we cannot guarantee that we shall one day be first, we can guarantee that any failure to make this effort will be our last . . . .If we are to go only half way, or reduce our sights in the face of difficulty, in my judgment it would be better not to go at all.”

To meet this goal required an all or nothing approach. Sending a man to the moon did not begin with a conversation or questions about: whether it could be accomplished; whether the country had enough money to support the effort; whether we knew how to build a rocket; how long it would take; or even if we could be certain to beat the Russians to the moon.

Those unknowns were left to be addressed ONLY after the commitment was made to the vision.

The vision dictates the effort: who, what, where and when.

The vision demands resources: financial, material, and physical.

The vision gathers supporters: engineers, politicians, unions, and scientists.

The vision provides direction when the future is unclear, when the path needs to be altered.

I would argue the vision is the most important aspect of any human endeavor— including wealth accumulation.

I do not pretend to be a John Kennedy. But I strongly believe that sending a man to the moon required many of the same activities and behaviors as are required from an individual in order to create true long term financial security and wealth.

• Setting goals
• Developing a time frame
• Making a plan
• Securing the resources necessary
to support the goals
• Committing resources in service
to the goal
• Implementing the plan
• Understanding that we cannot
guarantee the future
• Preparing for change
• Constantly moving forward

The good news is that these actions are under your control. They will virtually ensure your success in developing the resources to have freedom from worry about your financial life.
During the planning process and its implementation in future years, it is not unexpected that you will have concerns about issues that can affect your plan and divert your efforts but which may be generally out of your control. They could be such issues as:

• inflation
• the value of the dollar
• the rise and fall of the stock
market
• earthquakes
• tsunamis
• civil war
• energy policy and others.

These concerns could paralyze you, leading you to stand on the sidelines until the rules are clear or the challenge has passed. You may make risky bets seeking short term success, buying gold because it’s the hot investment. You may also never fully commit, choosing instead to only put your toe in until the water seems most inviting.

Although you may find examples of (perceived) success implementing the above strategies, you are more likely to find yourself pushed around by the winds of change. This could lead to inefficient investment choices that do not support you in long term. Such strategies may not be sustainable and become counterproductive to your long term success.

Plan for tomorrow, today.
I know you’ll be happy you did.

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long term financial plans and provides low cost investment management services. To learn more, 996.9664 or sbossio@magnum-financial.com.