Invest Using the Investment Strategy that Best Matches Your Personality

It’s Time to Invest!

Now that you’ve created separate investment accounts for each of your major goals, identified the best Investment Strategy based on your Investment Personality, and classified your goals based on their timeframe, it’s time to get down to business. It’s time to invest!

To help you reach your goals as quickly and safely as possible, first find the Investment Strategy that matches your Investment Personality below and then answer two questions for each account.

Hands-Off Investment Strategy

1) What is an appropriate asset allocation for this goal? For the Hands-Off investor, select a Lifecycle fund with a target date that is closest to your goal’s date. For example, if you are investing for a cruise you want to take in 2025, select a Goal Achievement Account or Lifecycle fund with a 2025 target date. If you are saving for your son’s college tuition and he starts his freshman year in 2032, select a fund with a 2032 target date. The Goal Achievement or Lifecycle fund automatically creates an appropriate asset allocation based on the target date so you don’t have to!

2) What specific investments should I buy for each asset class? You have a lot of options. Nearly every mutual fund company has their own Lifecycle fund, including Fidelity, Vanguard, T. Rowe Price, and others.

Just match your goal date with the Goal Achievement or Lifecycle fund’s target date for each goal. That’s it! That’s all you have to do for instant allocation and diversification.

Involved Investment Strategy

1) Determine if your goal is a Sprint Goal or a Marathon Goal? A Sprint Goal is a goal that requires a specific amount of money on a particular date. On that date, you need to withdraw all of the money from that goal’s investment account. It’s called a Sprint Goal because you’re using a burst of energy (money, in this case) and then the goal is complete and you can close your account for that goal. For example, needing $10,000 for a Venice vacation in two years is an example of a Sprint Goal because you’ll take the $10,000 out of the account, take the trip, and spend the $10,000 almost immediately.

A Marathon Goal, on the other hand, is a goal that requires you to withdraw money slowly over a number of months or years, instead of all up front. A marathon, like a sprint, has a specific beginning and a finish line, but, unlike a sprint, you need to conserve your energy for a much longer period. Likewise, a Marathon Goal has a specific starting date and requires the money to last a lot longer than that first initial withdrawal.

Retirement is a perfect example. You may know the year, month, and even day you want to retire, but unlike buying a new car or paying for a cruise, you’re not going to spend 100% of your retirement money on the day you retire. You’ll need part of your investment account on day one, but your retirement assets will need to pay for your retirement for years and even decades.

2) What is an appropriate asset allocation for a Sprint Goal? For Sprint Goals, where you will need to withdraw the entire amount from the account on the initial start date (e.g., buying a car, making a down payment on a house, going on a family vacation), you can use the following as a general sample allocation if you’re doing it yourself. Keep in mind that this sample allocation is a snapshot in time. The specific allocation you choose should depend on many factors including the current and predicted economic and financial climate.

3) What is an appropriate asset allocation for a Marathon Goal? The most appropriate allocation for a Marathon Goal depends on how close you are to reaching the goal and how long you will need money for the goal once you start withdrawing from the account. Marathon Goals require a conservative asset allocation that reflects the beginning withdrawal date, but that is also growth-oriented to reflect your on-going need for the money. Even if you have a Marathon Goal, if you’re not going to need to withdraw funds from the account earlier than eight years, you can simply use the sample recommended allocation for a Sprint Goal. If you have a Marathon Goal and you will need to start withdrawing funds from the account within eight years, you need to create a “weighted average” or blended timeframe based on the number of years until you begin withdrawing to fund the goal and the goal’s duration.

4) For Sprint and Marathon Goals, what specific investments should I buy for each asset class? This question is easy to answer since all you will be using are index funds. There are many index fund companies to choose from including, Vanguard, T. Rowe Price, Fidelity, Russell i-Shares.

Remember, as you get closer to reaching each of your goals, you need to re-allocate the accounts to a more conservative portfolio. It’s okay to have a more aggressive growth-oriented portfolio for goals that are five years or more away, but as they turn into four-year, three-year, two-year, and one-year goals, you need to ratchet down the account’s risk to create a more conservative portfolio. If you’ve created your allocation using index funds, this will be your responsibility. If you are using Goal Achievement Funds, it will be done automatically for you.

Consumed Investment Strategy

1) Determine if your goal is a Sprint Goal or a Marathon Goal? (see above)

2) What is an appropriate asset allocation for a Sprint Goal? (see above)

3) What is an appropriate asset allocation for a Marathon Goal? (see above)

4) What specific investments should I buy for each asset class? While the Involved Investment Strategy only uses index mutual funds, the Consumed Investment Strategy makes the most of “efficient” and “inefficient” asset classes by utilizing index mutual funds and actively managed mutual funds.

Efficient asset classes are those where the overall market responds so quickly to new information that it is nearly impossible for an individual investor or fund manager to have information unavailable to everyone else or to take advantage of news first.

For example, large cap stocks are an efficient asset class. Most large cap stocks are analyzed by hundreds of mutual fund managers with sophisticated computer programs and intricate networks of people around the world that quickly share information. With so many people and institutions intensely focused on these asset classes, it is unlikely that you will know anything that somebody—probably thousands—don’t already know. Your “secret” information or “hot tip” is almost certainly known by hundreds of other investment firms and thousands of investors. “Efficient” in an efficient asset class refers to the immediacy of information shared and its reflection in the price of a security.

Inefficient asset classes however, do not quickly reflect market changes based on new information. There are not as many fund managers and investors analyzing the securities. For example, small cap stocks are considered inefficient. While Microsoft may have hundreds of analysts covering it, smaller and lesser-known companies may only have a handful or none at all. As a result, it is possible to have information not as quickly reflected in the market price of small cap stocks.

You should use passively managed index mutual funds for the following efficient asset classes because active managers will probably not be able to beat the market after their higher expenses:

• • • Use index funds in these efficient asset classes:
      • Large cap stocks
      • Municipal bonds
      • Government and corporate bonds

You should use actively managed mutual funds for the following inefficient asset classes because it is not only possible, but likely, for an active mutual fund manager to do better than their benchmark:

• • • Use active mutual fund managers in these inefficient asset classes:
      • Small cap stocks
      • International stocks
      • High yield bonds
      • International bonds

Remember, as you get closer to reaching each of your goals, you need to re-allocate the accounts to a more conservative portfolio.

It’s okay to have a more aggressive growth-oriented portfolio for goals that are five years or more away, but as they turn into four-year, three-year, two-year, and one-year goals, you need to ratchet down the account’s risk to create a more conservative portfolio. For example, you’ll want to shift your retirement account to a more conservative portfolio as you near retirement age. Use the sample allocations for each timeframe above as a starting point.  If you are using Goal Achievement Funds, this will be done automatically for you. 

The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.