Investment Management: 

Making the Most of Your Money with an Investment Advisor

By Robert Bartley, CFP®, CPA

final puzzle pieces being placed with words financial planning on them
Chapter 1

What Is Investment Management?

Investment management is the professional coordination and management of various assets, such as stocks, bonds, cash, property, and more. 

Proper investment management is one of the most effective ways to make sure that your wealth is working hard for you. Accumulated wealth that is left to collect dust in a traditional savings or checking account is not working hard for you. In fact, it’s not even keeping up with inflation in most cases, especially at today’s ridiculously low rates. However, funds that take advantage of compound interest, dividends, and the magic of the market can see substantial returns. In such a way, money can beget money.

Many of us know this but the power of investing is real. At Bartley Financial, we see this all the time. If you start saving early, you can accumulate incredible wealth. Even with a modest portfolio, making smarter choices early on can have an incredible compounding effect over time. 

In the example below, you can see how starkly different the outcomes are for two sisters who invest different amounts of money at different ages:

In order to make the most of their wealth, millions of people place their assets in the hands of an investment advisor.  Most credentialed investment advisors have the education, training, experience, and talent often needed to identify profitable investment opportunities and increase returns.   

Below, we will discuss some of the most important things to know about investment management, no matter whether you’re based near Bartley Financial’s offices in Andover, MA; Bedford, NH; or somewhere else altogether. Taking the time to learn about how investment management works and the value investment advisors can provide can help make your financial dreams a reality.

Chapter 2

Asset Classes

Investment management involves many moving pieces, but the most important component of investment management is deciding where your wealth will be distributed. Assets are investment opportunities. Anything – tangible or intangible – can be considered an asset if it has value. More specifically, investment assets are assets that are expected to increase in value over time.

Assets are grouped with other like assets into what are called asset classes. There are four major asset classes:

  • Cash – Cash and cash equivalents describe any assets that can quickly and easily be converted into cash. This includes savings and checking accounts, money market holdings, and short-term bonds. Usually, only a small portion of an individual’s wealth will be allocated to a checking account or savings account. The rest of the wealth will be spread across myriad assets and asset classes in order to maximize returns.
  • Real estate and commodities – This asset class includes property holdings, as well as any tangible assets that could be bought or sold.
  • Equities – Equities, or stocks, describe partial ownership of a company, achieved through making purchases in the stock market.
  • Debt – An individual can own debt by purchasing bonds or securities from governments or companies. These typically pay regular interest, which is why this asset class is also sometimes referred to as “fixed income.”

Each of the four major classes outlined above can be broken down further into more specific asset classes. For example, equities can be further classified by location, market capitalization (total market value of a company’s stock in dollars), or whether they’re growth or value stocks.

A great resource for continued education is the book Unconventional Success by the highly respected manager of the Yale endowment fund, David Swensen. You can reference an overview of his advice by clicking here.

Chapter 3

Asset Allocation

So, with many different choices of asset classes, how do you decide where to invest?

The “best” place for your money to be invested is not universal. Instead, your decision will depend on many different factors, including your risk tolerance, time horizon, and goals. Asset allocation takes each of these factors into account and then structures an investment portfolio accordingly.

Goals

For proper asset allocation, you’ll need to identify your goals. Why are you investing? What do you hope to achieve? When do you plan to access the principal you invested? When do you plan to access any interest or dividends?

As with any strategy, you need to know where you’re going in order to determine the best path to get there. In other words, begin with the end in mind.

Risk Tolerance

Risk tolerance describes how comfortable you are with taking risks with your investments. All investments have some degree of risk, but the degree can vary widely, even within asset classes. The less risk there is, the more likely it is that the amount you invest will not be lost. The more risk there is, the greater the danger to your principal. On the other hand, low-risk investments tend not to have very high returns, while higher-risk investments may have a higher return.

As they say “no risk, no return.” Similar to life, those who are willing and take calculated risks tend to be rewarded.

It’s important to determine your risk tolerance as early as possible in the investment process. If you gamble on a riskier stock, for example, and later find that you are unable to bear the swings of the market, you may very well end up selling at the worst times. Alternatively, an investor who is comfortable with their degree of risk will be better able to ride market rollercoasters and potentially come out on top. There is no right or wrong answer here – risk tolerance is very individualized, so know thyself!

Time Horizon

Time horizon refers to when you anticipate needing access to your investment. This estimate will depend greatly on the goals guiding your investment portfolio and should also affect your risk tolerance.

Of course, your time horizon is a dynamic figure, since it will shrink as your estimated date of access draws closer. Good investment management will require rebalancing your portfolio regularly to reflect your changing time horizon.

For example, a parent who is investing for their child’s college education has a clear time horizon: the amount of time before their child matriculates. When their child is an infant, the parent can include riskier assets in the portfolio they intend to fund tuition with. That’s because they have many years to ride out swings and recoup losses before they will need to cash out and pay the tuition bills. As their child grows older (and their time horizon shrinks), it will be important for the parent to lessen the risk they take with the investments they intend to fund tuition with.

Of course, life is never quite this simple. The truth is that most people have many different concurrent time horizons, because people have many different simultaneous goals. So although you may need to lower your risk in a portfolio funding an imminent goal in order to avoid large losses, you can at the same time invest more aggressively in a portfolio with a longer time horizon.

A great deal of the above discussion regarding the time horizon is quite academic to many investors. It is common Wall Street speak. Focusing only on your time horizon neglects a very important variable, which is the value of the market. Knowledge of the value of the market can be as or more important than your time horizon. Why? Because if the market is a good value (after a bear market) the downside risk is much less. Market value is the best predictor of long term performance.

In fact, there will be times throughout your investing career when it will make sense to invest aggressively, depending on the market value and conditions, in order to maximize your returns.

Working with someone who is familiar with structuring portfolios using the proper asset allocation – who knows the risks and potential for returns of various investments – will help set you up for sustained success.

Chapter 4

Passive, Active, and “Core and Explore” Investors

After you have determined the broad strokes of your portfolio, you or your investment advisor will need to identify the specific assets to invest in. This can be particularly tricky when it comes to the stock market.

There are a multitude of investment philosophies (beliefs about how the market works) and even more investment strategies (patterns of interacting with the market) that can guide these decisions.

Passive Investors

Passive investors typically operate on the assumption that the best results can be achieved over the long term by matching the generally positive movement of the market. They assume that it’s not possible to consistently time the market. They also estimate that the costs associated with attempting to do so cannot justify the potentially unpredictable returns.

Passive investors often invest in index funds. Investing in an index fund can help you enjoy the general growth of the market. Index funds can be purchased for an overall market such as for US large companies (S&P 500 index) or a sector..

For example, someone who is hoping to enjoy the growth of the tech sector might consider investing in a NASDAQ index fund, which consists of many tech-oriented stocks. Individuals that are interested in small company (early stage) stocks might consider investing in the Russell 2000 index fund.

The advantages of these funds are that your investment doesn’t rely on the success of any one specific company. And spreading your wealth across multiple countries and sectors can help protect you from potential dips within any one country, sector, or industry.

Active Investors

Active investors do not invest in index funds, feeling either they or a professional investment manager, such as a mutual fund manager, can beat the market with their skill. Few actively managed mutual funds beat their index, e.g. the S&P 500. You can more regularly beat the market with proper asset allocation.

Asset allocation or diversification has been proven to be the secret sauce in investing. Betting that you will pick the next Apple or Amazon is a fool’s errand. By investing broadly you will capture these successful companies in your portfolio.

Core and Explore Investors

Core and explore is a strategy that melds passive and active investing, operating as a sort of hybrid.

In one approach to core and explore investing, the core component of your portfolio is composed of passive, diversified investments that are likely to match the market. The explore component is composed of hand-selected, often riskier, but sometimes more rewarding investments that may be regularly traded in an effort to outperform the market.

The right investment advisor can help you balance these two components, determine what percentage of your wealth should be allocated to each, and help you develop a sound strategy that can deliver the results you’re hoping for.

Chapter 5

How Your Investment Plan Fits into Your Financial Plan

Your investment plan does not exist independently; it should, instead, be part of a comprehensive financial plan.

The hard work of identifying your goals, priorities, limitations, and opportunities for growth over the short- and long-term happens as you formulate a financial plan. Then, your investment plan provides a means to achieve your goals using the parameters (cash flow, time horizon, etc.) outlined within your financial plan. In other words, investments are the tools used to accomplish your goals.

Although the terms are often used interchangeably, financial advisors are different from investment advisors. However, many financial advisors are also investment advisors. You would be wise to partner with a professional who fits both descriptions, as they will have a stronger understanding of how, precisely, your investment plan fits into your financial plan.

The one certain thing about the future is that it is uncertain. No matter how much of a pulse you might have on the market, there will always be countless things that you simply cannot know. The 2008 housing crisis, the 2020 coronavirus outbreak, and other major events have shocked global capital markets in very short amounts of time. Remember, you can’t afford the large losses when you are nearing a goal. The market doesn’t usually bounce back as quickly as it did in 2020. It took a lot of government debt through stimulus programs and Federal Reserve manipulation of markets to accomplish that. That is not something that is repeatable ad infinitum.

The purpose of having an investment plan is to put you in a position where, no matter what the future has in store, you will be able to dynamically pursue your financial objectives with a quantifiably justifiable roadmap. You have to be able to play both offense and defense well.

Developing a personal investment plan will take time, but the process remains extremely important when it comes to keeping your financial plan on track.

Chapter 6

Benefits of Hiring an Investment Advisor

Some people will try to manage their investments entirely on their own, regardless of their financial wherewithal or experience. There are myriad applications and websites that make it easy for ordinary people to access the market. However, this does not necessarily mean that you will be able to make the money you need to stick to your plan and achieve your goals.

There are many reasons why even highly educated and experienced financial professionals still choose to hire an investment management team, such as:

·      Expertise: professional investment advisors are required to be familiar with the mechanics of investing and should have a strong grasp of macroeconomics. They’ll be able to answer whatever questions you might have and make choices that are truly in your financial best interest.

·      Time: even if you have a full understanding of how investing works, finding profitable positions still takes time. Rather than doing this on your own, you can have someone make these decisions for you (or at least help). A dedicated investment professional should be researching the market and investment opportunities regularly. It is their job.

·      Liability: your investment advisor will help you navigate the many laws, regulations, and taxes that come with investing. They’ll ensure you are always in a good legal position and in a position to allocate wealth where it’s needed.

·      Objectivity: both fear and greed can cause individuals to make poor financial decisions. Our emotions are our biggest obstacle to successful investing.

  Discipline: professional investment advisors should have the strong discipline needed to stick to your portfolio decisions.

  Tax Implications: taxes are one of the largest expenses to any portfolio currently with a non qualified retirement plan (401k, IRA). Later, taxes get even more complicated as investors calculate when and how much to distribute from a qualified retirement plan.

Your investment advisor will help you answer important questions, develop a distinctive investor profile, and coordinate your investment choices to meet your specific needs.

Take time to compare different investment professionals, ask questions, and ensure that the advisor you choose is compatible with you. After all, you will entrust this person with your money. And they may need to shepherd that money through a volatile marketplace.

Chapter 7

Investment Management at Bartley Financial

Bartley Financial is built around a client-first ethos. At our firm, we are as committed to exhibiting high levels of professionalism as we are to building relationships with clients built on trust and mutual respect. That’s why we only offer a transparent, fee-only compensation structure, so that our clients never need to be concerned about a conflict of interest.

Bartley Financial has an experienced team of CPAs and CFPs® that help clients manage their investment portfolios, plan for retirement, strategize taxes, or execute any other initiatives in pursuit of optimum financial health and minimal financial stress.

We are experienced and dedicated financial planners and  investment advisors. We have experience creating comprehensive strategies to ensure that your wealth is being leveraged to move your goals closer. We execute a core and explore investment strategy that will optimize your ability to meet your goals and live the life you desire. We will start by crystallizing your goals in order to begin with the end in mind.

 

Contact us today to begin a relationship with a team of knowledgeable, trustworthy professionals who put their clients first.