How To Set Investment Goals

A sound investment plan begins by determining your objectives while understanding any limitations or constraints that may exist. While most objectives are long-term, a plan must be designed to persevere through changing market environments and be able to adjust for unseen events along the way. If you have multiple goals, each of these goals needs to be taken into consideration. Once developed, a plan needs to be reviewed at regular intervals.

Consideration should be given to your time-horizon for each goal within the plan. For example, if college education expenses will be incurred in 10 years, while retirement is 25 years off, then the plan needs to consider these different time-horizons and plan accordingly.

Understanding your time horizon will impact which investment strategy you select for your portfolio. The shorter the time period to achieve a particular goal, the less risk you would want to take, because a significant market drop may impact the amount of money available to withdraw or the opportunity to benefit from a market rebound later. It is also important to give some thought to your tolerance for market volatility and loss, as well as your ability and willingness to contribute money into the plan each year. Higher returns often come with greater risk, so the trade-off is one that needs to be understood and chosen carefully.

Create a Plan

Without a plan, many investors take an ad-hoc approach to building a portfolio, focusing on acquiring popular investments rather than considering how the entire portfolio is constructed to meet their objectives. Many investors’ actions are influenced by the performance of the broad stock market, with a tendency to increase stock exposure when markets are moving higher, and reducing stock exposure when markets are falling. This behavior may result in investors buying high and selling low and may cause them to underperform market averages by substantial amounts over long market cycles. Mutual fund flows confirm this notion, with individual investors buying equity mutual funds just prior to market peaks and selling them just prior to market bottoms.


The value of diversification should not be ignored. It is important in building a portfolio to select a combination of assets that offer a reasonable chance to achieve your objective because asset allocation is responsible for almost 90% of a diversified portfolio’s return over time. Recall that from 1926 through 2013, a 100% bond portfolio returned an average 5.5% annually, while a 100% stock portfolio returned an average 10.2% each year. A 50% bond, 50% stock portfolio returned an average of 8.3% each year. But over shorter periods, the results can vary significantly from these long-term averages. For example, for the period 2000 through 2013, U.S. stocks returned an average 4.3% annually, while U.S. bonds returned an average 5.7% annually. Looking forward, the return for bonds may be lower than that achieved over the past 10 to 15 years, because interest rates are most likely to be increasing over the next decade, resulting in lower bond prices.

By diversifying across both asset classes (stocks and bonds) and also within each asset class, a portfolio’s risk is often reduced. Various asset classes and sectors of the market often perform differently from one another and diversification spreads the risk and the opportunity. Owning a diversified portfolio with exposure to many different asset classes and segments allows you to participate in stronger areas of the market and reduce the impact of the weaker areas.

If you follow these steps in setting investment goals and implement a detailed plan for achieving them, you will be well on your way to achieving financial success and peace of mind! If you would like to explore how to meet your goals or how well you are diversified, a Pinnacle Wealth Manager would be pleased to help.

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Bearish Tendencies and Silver Linings

2015 had many twists and turns, but from a financial market perspective, it was effectively a road to nowhere when looking across a variety of asset classes. In U.S. equity markets, large company stocks (large cap) barely moved as just a few sectors and stocks were big winners. In the broad market, many stocks performed far worse than the large cap averages and gave investors the false impression that the market was generally flat. On the contrary, a broader measure of the market which consists of 1700 equally weighted stocks was down roughly 7% on the year, and helps to highlight how skewed the major indices were, due to just a few large companies that had good years.

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A Peek At The Market

While 2015 had its share of volatility and ended with virtually no gains in stocks, 2016 sprinted to the downside with volatile global markets, a bifurcated U.S. economy, and the first rate hike in a decade.

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A Time for Caution

The third quarter came in like a lamb and went out like a lion, as the return of volatility hit risk assets hard across the globe. As in previous quarters, emerging market stocks and commodities suffered double digit declines as markets continue to deal with the end of the commodity super-cycle and the mix of structural and cyclical problems reverberating throughout the emerging market complex.  But the big news of the quarter was a catch up in developed markets that had previously appeared impervious to the problems that were festering in the developing world.

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No Pain, No Gain – Taking the Long View on the Dollar and Commodities

“Long ago, Ben Graham taught me that price is what you pay; value is what you get. Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down” – Warren Buffett

We pointed out in our recent quarterly commentary that a major countertrend movement was brewing in both the dollar and commodity patch. In other words, the primary trends for the dollar (up) and commodities (down) might have hit a point where their respective gains and losses were overdone in the short-term, but we have a firm conviction that the strong dollar and weak commodity thesis should continue to dominate the backdrop in the long-term.

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Pondering Halftime Adjustments

At the beginning of the year, we wrote about an aging bull market that we thought could be ridden, but with the caveat that one wouldn’t want to take too much risk given the magnitude of the move, current valuation levels in the U.S., and an overall evidence profile that was clearly mixed with pockets of both strength and weakness. When weighing the evidence, our dashboards offered no reason to reach for additional risk this late in the cycle, but instead we tried to focus on some big picture themes that could help us find attractive opportunities to position for.

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How Are The Year’s Investment Themes Playing Out?

At the beginning of the year, we identified several themes that might drive investment markets in 2015. Forecasting is a hazardous process, but it’s part of the job for tactical managers who have the freedom to move portfolios according to changes in macro and market conditions.

I recently reviewed our themes for the year (written up in detail in our latest quarterly), and made a few notes regarding how those themes are playing out.

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Man Versus Machine in Investing

Over the last couple of months, we have been preparing to expand our product offering by launching two new sets of strategies, called the Market series and the Quant series. They are offered as alternatives to our traditional strategies, now referred to as the Prime series, for a chance to help our current and future clients achieve their financial goals. While the Market series and the Quant series are different under many aspects, they share one important feature: under both strategies, a portion of the client’s portfolio is managed according to a rules-based, quantitative model developed in house at Pinnacle. Diversification has always been a core tenet of Pinnacle’s investment process and the way we manage risk. However, with this move, Pinnacle has now further expanded the diversification it offers to clients to a new dimension of risk: decision risk. While the Pinnacle traditional (now Prime) strategies rely primarily on the time-proven judgment, experience, and intuition of the members of the Investment Team, the new strategies are based on a rules- based decision-making process that is more objective and unemotional. In Pinnacle jargon, we say the Prime strategies are subject to manager risk, while the new strategies are subject to model risk. Modern Portfolio Theory tells us that by combining different sources of uncorrelated risks, we can move our portfolio farther out in the efficient frontier and achieve a better expected return-to-risk ratio.

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The Countdown to QE in Europe

Next Thursday (January 22), the European Central Bank will be hosting an important meeting. Last year, Europe experienced a setback in their recovery from the debt crisis as growth ground to a halt. As a result, the ECB took a series of actions over the past several months in an attempt to support the recovery. Their efforts thus far have been considered lackluster by financial markets, which has led to growing speculation that ECB President Mario Draghi will resort to a large-scale asset purchase program (otherwise known as quantitative easing) in hopes of achieving the desired impact. Indeed, he has stated on more than one occasion that the ECB intends to restore the balance sheet back to its 2012 level, which translates into an expansion of nearly one trillion euros from its current size.

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Investing and Hindsight Bias

The current bull market has been steaming ahead since the market bottomed in March 2009. Consumers of investment advice have noted that passive, buy and hold strategies have outperformed most active strategies over this time period, giving some the false impression that ‘risk management,’ in the context of tactically changing portfolio asset allocation to defend against bear markets, is a fools game.

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