20 Keys to Being a________________

Smarter Investor________________

Like many investors, you’re ______________________probably torn between greed _______________________and fear._______On the one hand, you want to generate as higha return as possible from your investments inorder to pay for a comfortable retirement, fundthe high cost of college education, start a smallbusiness, pass money on to your heirs orfinance a myriad of other major life expenses.

At the same time, you may fear the investmentmarkets. Perhaps you’ve been burned by marketdeclines, bad investment advice or taking on toomuch risk by grabbing for high returns. Ormaybe investments and investing appear socomplicated you’re afraid to venture beyond thebasic savings accounts you know.

This brochure, produced by the FinancialPlanning Association (FPA), the membershipassociation for the financial planningcommunity, offers 20 key steps to rein in thatgreed and ease your fears through the wisemanagement of your investments. The brochureis not designed to make you a great stock pickeror predict the next market boom or decline.Rather, it shows you how to apply time-testedinvesting principles and techniques so thatdespite the inevitable ups and downs of themarkets, you can realistically achieve yourfamily’s financial goals.

The information presented here is also valuablewhether you intend to manage your investmentsyourself or work closely with a financial planneror other investment advisor.

The Financial Planning AssociationTM (FPA®) is the membership organization for the financialplanning community. Its members are dedicatedto supporting the financial planning process inorder to help people achieve their goals anddreams. FPA believes that everyone needsobjective advice to make informed financialdecisions and that when seeking the advice of a financial planner, the planner should be a CFP® professional.

To locate a CFP® professional in your area,please call FPA’s National Financial PlanningSupport Center at 800.647.6340 or visitwww.fpanet.org.

passing money on to heirs. Investing withpurpose makes it easier to stick to yourinvestment plan and to invest income youmight otherwise spend. Goals should berealistic, with a specific amount to accumulateby a reasonable target date. “Retirement” isn’t agoal. What kind of retirement you want andwhen you want to retire are. Write down yourgoals and discuss them with your family.

4. Don’t just grab for the____________________highest return.____________One of the most misunderstood aspects ofinvesting is the belief that investing is all aboutseeking the highest possible returns. Thismisperception is why so many investors gotinto trouble during the booming stock market ofthe late 1990s when they disdained “average”returns and began chasing the riskiest ofstocks. Their purpose was simply to “make asmuch money as possible in the shortest time.”This example illustrates why investment goalsare important. With reasonable, specific goals,you can make informed, realistic investmentdecisions designed to accomplish your financialgoals without taking unnecessary risk. Makingdecisions based on these investment goals iswhat steers you on an even course between therocky shores of greed and fear.

5. Understand your own___________________tolerance risk.____________In addition to understanding the risks of eachtype of asset and investment vehicle, you needto understand how much risk you’re willing totake and which types of risk worry you themost. Risk tolerance is partly a function of yourinvestment goals, how much time you have to

1. Understand the difference_______________________between saving and investing.________________________Saving is for smaller, near-term goals, such asthe next family vacation, a car or a financialemergency. Keep cash in a savings account,money market or short-term certificate ofdeposit where you would have little or no riskof losing principal and can have immediateaccess to your funds.

Investing is for larger, longer-term goals—atleast five years away—such as retirement orcollege. Investing carries risk such as loss ofprincipal or not earning as much as anticipated.But wise investing also provides a greateropportunity for earning a significantly higherrate of return over the long run than you canearn through savings.

2. Put the rest of your financial _________________________house in order first.________________Before investing, consider tackling several otherhousehold financial issues. Create a budget, orspending plan, in order to free up money forregular investing. Pay off expensive credit cardsor other high-interest consumer debt that eatup valuable investment dollars. Build a cashemergency fund and buy the right kinds andamount of insurance to protect against afinancial setback—otherwise, you may beforced to raid your investment accounts forcash at a time when the market is down or withcostly tax consequences.

3. Clarify your goals. _________________Smart investing means investing with a specificpurpose—those life goals such as retirement or

long periods of time, for example, their short-term risk can be high, as many investorspainfully learned during the market decline of2000–2002. Risk is not limited to stocks, either.You can lose money in real estate, corporatebonds, gold and commodities.

Even so-called “safe” investments carry somerisk. U.S. Treasury bonds, for example, arefederally guaranteed against loss of principal aslong as you hold them until they mature.Because they are subject to interest-rate riskslike any other type of bond, however, it’spossible to lose money if you sell them beforematurity.

Don’t understand interest-rate risk? If you don’tunderstand how a particular investment works,or the risks that come with it, don’t invest in it.Instead, invest a little in education first. Askyour financial planner or investment adviser forresources to help you make the best decisions.

7. Hold realistic market___________________expectations.___________One of the downfalls for many investors duringthe booming market of the late 1990s was theirbelief that high double-digit returns werenormal for stocks. But historical investmentreturns reveal otherwise.

According to Ibbotson Associates, large-company stocks, such as those found on theDow and the S&P 500, returned an annualaverage of 10.7 percent from 1926 through2001. During the same period, small-companystocks returned 12.5 percent and long-termgovernment bonds averaged 5.3 percent.

But these are only averages over many years. Inany given year, you will probably not earn the

invest, other financial resources you have and,frankly, your “fear factor.” Investments thatkeep you awake at night, regardless of how“good” they might be for your needs, are notthe right investments for you.

Accurately gauging your tolerance for risk canbe tricky, however. It’s easy to feel confidentwhen the market is up and conservative whenit is down. A CFP® professional can help youassess where you truly stand. Questions youand your planner might ask include:

• Are you more concerned about losing principal or losing purchasing power?

• How much principal are you willing to lose?

• How worried were you about your investments during the recent market decline?

• Which of your current investments keep you awake at night?

• Do you track your investments daily (a possible indication of unease)?

6. Educate yourself about_____________________investments and investing._____________________Even if you work with a financial planner orother investment advisers, you need to have asolid understanding of how different types ofinvestments work, their potential returns, theirrisks and how you can assemble them in acohesive portfolio that’s right for your needsand goals.

Pay particular attention to investment risk. Allinvestments carry some degree of risk. Whilestocks in general tend to perform well over

annual “average” return. You’ll earn either moreor less than the average. Knowing the historicalaverage returns can keep these fluctuations inperspective.

8. Follow a detailed written plan.__________________________Formally, this is called an investment policystatement. It’s a road map to keep you oncourse through good times and bad, toeliminate investment ideas that don’t fit yourcircumstances, and to provide a way to monitorthe actual performance of your investments.This plan is, of course, subject to changes overthe course of your investing lifetime.

The plan outlines such things as:

• Investment goals and time horizons

• Minimum average annual return needed to achieve those goals

• Current income needs from the portfolio, if any

• Types of investments you will and won’t include

• What investment vehicles you’ll use, such as individual securities, mutual funds, separatelymanaged accounts, or taxable and tax-favored accounts

• How assets are to be allocated within the total portfolio

• Rebalancing procedures

• Potential tax consequences

• Estimated risk level of the portfolio

9. Allocate investments according___________________________to goals and needs._______________How will you divvy up your investment dollarsamong various asset categories such as large-company and small-company stocks,international equities, government andcorporate bonds, cash, real estate, and other assets?

The answer depends on several factors. Keyamong them are your investment goals andyour timeline for achieving them. The sooneryou’ll need the funds, usually the moreconservative your investments should be.

Also, what other financial resources areavailable to you? If Social Security and a goodpension will generate most of your incomeneeds in retirement, you may feel comfortablewith a more aggressive approach to yourinvestment portfolio. You may opt for a moreconservative approach, however, if yourinvestment portfolio will be a primary source of retirement income.

10. Diversify your investments._________________________Too often, individual portfolios invest heavily in a single type of asset, often to the nearexclusion of other types. A popular choice inrecent years has been large-company U.S.stocks, also called “large-caps.” These stocksoutperformed other major asset categories in1989 and from 1995 to 1998. Yet, in all otheryears between 1965 and 2004, large-caps were outperformed by small company stocks,international stocks, intermediate bonds orinvestment real estate.

Because it’s almost impossible to identify inadvance which asset classes will lead the way

of this was tech stocks, represented by theNasdaq stock index. The Nasdaq returned arecord-smashing 85.6 percent in 1999, but fellnearly 40 percent the following year, and lostanother 21 percent the next year.

The major problem with chasing the currenthottest investments is that by the time mostinvestors discover that an asset category orspecific investment is “hot,” the investmentoften has already realized much or most of itsrun-up in value. Consequently, investors oftenget in at about the time the investment is ready to fall.

Calculations by DALBAR, a consulting firm,show that stock investors who frequently tradein and out of mutual funds earned a meager3.51 percent annually between 1984 and 2003—dramatically below the 12.98 percent annualaverage earned by the S&P 500 stock indexover the same period.

13. Don’t ignore ‘cool’ performance.____________________________The opposite of chasing hot investments isignoring those suffering through tough times.Real estate investment trusts, for example, didpoorly in 1998 and 1999, but boomed in 2000and 2001 when stocks faltered. Governmentbonds lost money in 1994, but returned nearly14.5 percent the next year.

A time-tested way to avoid the problems ofignoring cool performance and chasing hotperformance is to stay diversified and stick with the asset allocations spelled out in yourinvestment plan.

during any given time, it’s wisest to spreaddollars among several investment classes.Research has shown that this diversificationreduces risk while at the same time maintainingor even improving portfolio performance.

Investors also may want to diversify withinbroad categories. Among stocks, for example,they might divide their money between valueand growth stocks, or between large-cap andsmall-cap. They may also want to include avariety of industries or sectors like technology,consumer goods and healthcare.

11. Don’t overload on__________________company stock._____________As many employees at Enron and other largebankrupt companies learned the hard way,loading up your 401(k) with your employer’sstock can be disastrous. Both your job and yourretirement security are riding on the fortunes ofa single employer and a single industry.

Financial planners typically recommend limitingcompany stock to no more than 10 or 20percent of the account’s value. But this can bedifficult to do if the employer will only matchyour plan contributions with company stockwhile restricting how soon you might sell thestock and diversify through other investmentoptions offered. Consequently, you may need to try to diversify your overall portfolio throughother types of assets you hold outside your401(k) plan.

12. Don’t chase ‘hot’ performance.___________________________Today’s hot investments are often tomorrow’scold turkeys. The most recent glaring example

16. Invest regularly and___________________automatically.___________Greed and fear often tempt investors to try to“time” the market by judging when to be induring up markets and out during downmarkets. But even professional investors can’tconsistently time the market.

That’s why CFP® professionals stronglyrecommend investing on a regular basisregardless of what the market is doing. Thiskeeps your eyes on the long-term goals and noton the interim volatility. Funding investmentaccounts through automatic withdrawals fromyour paycheck makes this a lot easier.

17. Pay attention to investment_________________________expenses.________During booming markets, investors often don’tpay much attention to investment expenses.But the market decline of 2000–2002 and therecent mutual fund scandals have madeinvestors more aware of overhead, tradingcosts and other investment expenses. You can’tcontrol the market but you can control yourexpenses. Investing with an eye towardlowering investment costs can significantlyimprove your returns over many years.

18. Don’t let taxes dictate.____________________

Investing with an eye on tax-saving strategiescan save money. But many investment advisersbelieve that tax-saving strategies should notoverride the underlying economics of aparticular investment. For example, investorssometimes are reluctant to sell a profitableasset, even though it might make economic

14. Stay in the market.__________________Nervous investors often sit on the sidelinesduring down markets until they’re “convinced”the market is rebounding. But by the time theyget up enough nerve to get back in, they’velikely missed much of the rebounding market’sgains, which commonly occur in the earlystages of recovery.

SEI Investments studied 12 bear markets sinceWorld War II. Investors who either stayed in themarket through its bottom, or were fortunate toenter at the bottom, saw the S&P 500 gain anaverage of 32.5 percent (not countingdividends) during the first year of recovery.Investors who missed even just the first week ofrecovery saw their gains that first year slide to24.3 percent. Those who waited three monthsbefore getting back in gained only 14.8 percent.

15. Start investing early.__________________

Remember the famous image of Archimedesmoving the world on the end of a long lever?Investing over time provides that same kind ofleverage. The longer you invest money (thelonger the lever), the more it “works” for you bygrowing faster and faster.

For example, invest $10,000 at an eight percentannual return inside a tax-deferred accountsuch as an IRA and you end up with $21,589after ten years. Keep the money in for 20 yearsand it grows to $46,610. Keep it in for 30 yearsand the same $10,000 initial investmentballoons to $100,627.

sense to do so, because they hate paying thecapital gains taxes—only to see the investmentstumble in a down market, costing them farmore in lost value than if they had sold it andpaid the taxes in the first place.

19. Rebalance your portfolio._______________________The asset mix that you originally assigned toyour portfolio will probably become unbalancedover time as different types of assets performdifferently. A portfolio allocated to 65 percentstocks, 25 percent bonds and 10 percent cashmight shift to a 75/20/5 mix during a boomingstock market.

You’ll want to return these allocations to theiroriginal mix after the boom—otherwise, yourportfolio has become riskier because it’s moreheavily weighted to stocks than before. You canadjust by either selling off some stocks andreinvesting in the other categories, or perhapsdiverting new money into the under-weightedcategories.

How often to rebalance your portfolio dependson several factors including your income needs,age and life events. Many experts recommendrebalancing at least once a year, depending onindividual circumstances.

20. Monitor and revise your______________________investment plan._____________

As with any financial plan, you should revisityour investment plan at least once a year.

First, you’ll want to see if you’re sticking withthe guidelines outlined in your investmentpolicy statement. Second, you may want to

make changes if the financial circumstances inyour life or your tolerance for risk havechanged. For example, you may want to adjustinvestment mixes as you near or enterretirement. A marriage, divorce, death in thefamily, birth of a child or a new job also maywarrant a different asset allocation. Third, youmay also want to make changes if a particularinvestment is underperforming its competitionor is not generating the income you need.

You’re not alone. Investing can beoverwhelming, but there is plenty of help outthere. Your CFP® professional can provideinvesting expertise, objectivity, advice on howyour investment plan fits in with your overallfinancial needs and even day-to-daymanagement of your investments.

Whether you turn over the management of yourinvestments to a professional or do it allyourself, you are ultimately responsible for theresults. This is your money and these are yourlife goals. The more you learn about investingand the more care you take to develop a soundinvestment plan, the less likely it is you’ll becaught between those nasty twins—greed andfear.

© 2004 The Financial Planning Association

The Financial Planning Association is the owner of trademark,[and registration], service mark and collective membership markrights in, various U.S. registrations/applications for: FPA, and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

CFP,® CERTIFIED FINANCIAL PLANNERTM and arecertification marks owned by the Certified Financial PlannerBoard of Standards, Inc. These marks are awarded to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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