Taking action: Implementing your written investment plan

4 Jan

Taking action: Implementing your written investment plan

When asked recently what I am writing about in this se­ries of articles, I explained that each of the last few arti­cles has outlined how the individual investor can apply one step of the six-step investment management consulting (IMC) process in their own portfolio. My colleague was surprised be­cause it is typically affluent institutional or pension fund cli­ents, known to be methodical – almost clinical – in their approach toward money management, who make use of the IMC process.

He laughed and asked why an individual investor would want to read a bunch of industry-specific rhetoric on an invest­ment process developed for pension plans. “Why don’t you write on current events and more topical issues of interest? Be­sides, if they learn these steps and procedures, your readers might not come to us for any further investment advice and counsel.” In retrospect, I must concede that these are good questions, and ones that you may be asking yourself as you read this last article in the series.

In my first article in this series, I introduced the notion that “the most effective way to circumvent the common mis­takes made by an affluent investor…is first to establish a pru­dent process or strategy and then stick with it.”

Even the most sophisticated and experienced investors fall prey to common, needless mistakes, but many of these mistakes can be avoided for a more desirable outcome when clearly de­fined objectives are laid out and a proven process is put into ac­tion. Well aware that any investor must navigate through a myriad of decisions to reap the rewards of investing, I intro­duced the six steps of the IMC process as a framework and theo­retical foundation that any investor can use for this purpose.

One common mistake is conducting a search for profes­sional money managers to invest your portfolio without first having written an investment plan, or ‘investment policy state­ment’ (IPS). I have seen investors exert far too much time and energy searching for the money managers who have the best performance numbers without first considering whether that manager’s mandate or style is even appropriate for their portfo­lio. How will last year’s best performing small capitalization stock manager further your financial well being if your goals and objectives dictate that you should not even consider holding ‘small-cap’ stocks in the first place? Not having determined pre­cisely what asset allocation will best support an investor’s goals and objectives may result in investing too heavily in one asset class purely because of that investor’s familiarity with that type of asset.

Figure 1) A ten-year perspective of active versus

Figure 1) A ten-year perspective of active versus passive investment strategies in Canada. Note that all returns are gross of fees. Avg Average; Cap Capitalization; Cdn Canadian; TSE Toronto Stock Exchange. Reproduced with permission from Northern Trust Global Advisors, Inc

As we near the end of our odyssey through the IMC process, the four steps we have covered in previous issues are summa­rized as follows.

Step 1: Analysis of current position, goals, and objectives Step 2: Design of your optimal portfolio Step 3: Formalization of your investment policy Step 4: Research, selection and combination of professional managers

The following two steps in the IMC process remain.

Step 5: Implementation of the IPS

Step 6: Monitoring and evaluation of your portfolio

Step 5, or the implementation phase, makes up the remain­der of our discussion.

At first, step 5 may appear to be one of the simplest and least taxing elements of a successful investment management pro­cess, but it is not without its costs and challenges, or its opportu­nities. Properly executed, it involves selling existing assets and replacing them to bring your portfolio into alignment with the optimal portfolio designed in step 2 of the IMC process.

If you have ever purchased any investments in the past, you have executed this step of the process whether you had a con­ceptual framework surrounding it or not. Regardless of what ap­proach you used to arrive at your decisions or what vehicles of investment you selected, you must have undertaken some ver­sion of this step. Because the effective execution of this step is likely to have an important effect on investment results, it is prudent to understand some of the issues involved.
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