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.

Copyright: convisum / 123RF Stock Photo

A Message to Clients from the Chairman of the Investment Committee

The S&P 500 Index is down over 12% from its high last May, which qualifies as a market correction but not a bear market. In fact, it’s been quite a while since we experienced our last bear, although it may not feel that way. From April to October of 2011, the stock market declined by 19.39% on a closing basis. While experts can debate whether this meets the definition of a bear market (which are typically defined as 20% declines), those who remember it will recall how scary it was. By the time the market bottomed in October, many were recalling the 2007–2009 bear market, which was gut wrenching for everyone. During that excruciating market decline, the S&P 500 Index fell by 55% and the economy tumbled into a deep recession. It is only in hindsight that we can see that both the market bottom in 2009 and the October low in 2011 marked important market bottoms. Since October of 2011, the S&P 500 Index rallied 94% to its eventual high set in May of last year.

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We’re Not Pulling the Portfolio Ripcord… Yet

Pull the portfolio ripcord?

The second quarter started in somewhat choppy fashion as small cap and other high flying momentum stocks continued to face pressure as investors decided to shed stocks with swollen valuation multiples. The major averages fared better than their risky counterparts, and after a brief dip stocks began their ascent towards record breaking highs on the back on improving economic data, decent earnings growth, and continuing liquidity support from global central banks.

Meanwhile commodity markets appeared to work off some of their overbought readings from earlier in the year as they treaded mostly sideways during the quarter. Within fixed income, the bond market also fared well as investors continued to flock towards anything with a yield, foreign bond markets bubbled, and a number of technical factors came together to keep bond investors satisfied despite meager nominal yields.

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Time for a Portfolio Fire Drill

Time for a Financial Fire Drill

NOTE: There is a 100% probability that bull markets will be followed by bear markets. This article is not a forecast about imminent market behavior. For our latest views on markets, clients should read our market review. Financial fire drills are all about testing your emotional response to a bear market, which you should be doing all the time. (And it’s not a bad idea to check your emotional reaction to bull markets, as well.)

When I was a kid, my family lived in a two-story colonial in South Jersey. Once each year, to the great excitement of all concerned, my parents had my brother, sister, and me conduct a fire drill. We got to climb out of our bedroom window onto the roof of the garage, and then down from there.

Our house never suffered a serious fire, and we never had to make a rooftop escape, but my parents were still glad that we’d practiced what we had to do, just in case. It was a very good idea.

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Forget the Glitz… Successful Investing is Hard Work

Investing is hard work

If you are looking for a movie about power, money, sex, drugs, yachts, Lamborghinis, high-pressure sales tactics, stock manipulation, sex, and drugs (did I mention sex and drugs?) then go see the new Martin Scorsese movie, The Wolf of Wall Street, starring Leonardo DiCaprio. The film is based on the memoirs of Jordan Belfort, the founder of the brokerage firm Stratton Oakmont, which functioned as a boiler room selling penny stocks in the 1990s. I don’t want to give away the ending, but I will say that if you enjoy watching unimaginable amounts of corruption and debauchery, you are going to love it.

All of which gets me thinking about the admittedly boring world of our Pinnacle investment analysts.

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Are We Making Too Many Trades?

Actively managing a portfolio requires buying and selling securities with the goal of managing risk and outperforming passive benchmark portfolios. Clients are correct to question the number of trades that are being made in their portfolio in pursuit of this objective. After all, one trade can generate several trade acknowledgments from our custodians, and each trade acknowledgement shows the brokerage commission charged for each transaction. Clearly the cost of trading has a negative impact on total portfolio return. As we approach year-end and Pinnacle’s investment team continues to generate commissionable transactions in our managed accounts, it might be helpful to analyze the cost of brokerage commissions relative to our ability to implement our active management strategy.

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History Sides with Momentum at Year’s End

With less than two months to go in the year, the markets have returned a remarkable 23% on the S&P 500 index. Our portfolios are diversified, so we haven’t gained that much, but many policies are in double-digit territory (which represent significant gains in less than a year). With healthy returns already booked, one has to question whether investors will want to cash out and go the beach. I admit that a trip to the Bahamas sounds great right about now.

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Media Gets it Wrong on Active Management… Again

In a recent “Your Money” column in the New York Times, John Wasik did a great job of delivering the status quo message about portfolio expenses. He reminds us that John C. Bogle, Founder of the Vanguard Group, and many others, have performed studies that demonstrated that active managers cannot beat a passive index because of the fees charged in actively managed funds. He reminds us that these consist not only of the well-known and often discussed fees in a fund’s expense ratio, but also include ‘hidden’ fees like the cost of managers who leave too much money in cash (which does not earn market returns), and fund transaction costs. The article goes on to mention a recent paper by William Sharpe, the Nobel Prize winner this year in Economics, who compared the expense ratio of Vanguard’s Total Stock Market Index Fund to a more expensive actively managed fund, and found that the costs of active management were $2,000 for a $10,000 investment over ten years.

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