The Fix The Investments Series

…you take all the steps. In order!

When it comes to everyday matters, like brewing a hot cuppa joe, you need to take the steps in order.

But what about investing?

To most investors, investing is simply getting a good line on a hot stock or fund, and then buying it. If only. In reality, that buy order you put in for your beloved XYZ stock should have been a final decision, not an initial one.

So before plunking down your hard earns on some flight of fancy, there are at least 8 steps* you need to take before you decide if it’s the flight you want to board or if you should wait in the terminal for the next flight to a more desirable destination. Further, these 7 steps are comprised of many smaller considerations and decisions.


Paradigm. Nothing more than a fancy word to define a “widely accepted model, pattern, belief or concept.”

But as it applies to your personal approach to investing, your PIP becomes the center of your personal finance universe. Your paradigm may be built around a passion to day trade. If so, go for it! You can stop reading here if that is the case.

If your paradigm aligns with ours then it will look something like this:

  • Stop trying to BEAT the market, because you won’t. 
  • Learn to BE the market by adopting a superior passive investing strategy, using low cost, no load index mutual funds and exchange traded funds (ETFs). 
  • Construct a Strategic Asset Allocation goals-based model to reduce portfolio risk, achieve proper diversification, and improve return consistency.

2-Put it in writing. Establish your SMART GOALS 

Goal setting is number one with a bullet. In its broadest context, investing is about achieving financial goals. Investing is a means to an end, not the end itself, so it stands to reason that the first step in making a decision about a given investment is “does it fit my overall plan to attain my long-term financial goals?” Most investors have many financial goals concurrently: retirement, children’s higher education, taking care of aging parents, having enough to start a small business, and many more.  (See What is Holistic Financial Planning?)

SMART goals are Specific, Measurable, Attainable, Relevant and Timely.

“I want to be a millionaire!” is not a goal. It’s a game show.

“I want to accumulate one million dollars by 2044 by investing $14,000 a year in a globally diversified portfolio of equity, fixed and alternative exchange traded funds, and earn 8% annually.” Now that is a SMART goal.


There are many metaphors for financial planning, from roadmaps to ladders. Roadmap seems to get a lot of  use because of the journey aspect. Roadmap is certainly fitting, but I prefer Blueprints, because it connotes building something that will last.

Blueprinting your financial wellness consists of reducing your most important goals to writing, and then making decisions exclusively within a framework of interrelated control documents, your blueprints, such as your budget, your financial plan, and your investment policy statement. Each document serves a specific critical function and allows you to make informed, unemotional financial decisions. Your blueprints collectively memorialize your goals and encompass the directives of your overall financial plan, and as you may already know, plans aren’t real until you write them down.

4-Develop a goals-based ASSET ALLOCATION

Asset allocation comes after you’ve defined and established your financial goals. Its going to be the most important single investment decision you make. Establishing a defined asset allocation model helps you balance risk and reward in your portfolio by forcing you to consider how close a given investment matches your ability to realize your goal. Sits well with your tolerance for risk and fits your investment time horizon.

Broad asset classes (stocks, bonds, cash, etc.) are not entirely correlated, that is, at any given time they move in different, and often entirely different directions, and by diversifying portfolios across different asset classes can help to optimize the portfolio’s risk-adjusted returns.

…asset allocation accounts for 93.6% of the variation in a portfolio’s quarterly returns…

The now famous academic study titled Determinants of Portfolio Performance* published in the Financial Analysts Journal in 1986, has become the benchmark to explain the importance of asset allocation. The seminal Brinson, Hood and Beebower (BHB) study asserts asset allocation is the leading determinant of a portfolio’s risk and return variability, with individual security selection and market timing (that is, active management) playing bit parts. BHB concluded that asset allocation accounts for 93.6% of the variation in a portfolio’s quarterly returns.

Brinson, Hood, and Brian D. Singer updated the original BHB study and found a return variance of 91.5% in a different time period, 1977 through 1987. The theory still held: the preponderance of risk and return variability is explained by asset allocation. Monitoring and Rebalancing your initial allocation model is a critical activity.

As part of an effective asset allocation model, before moving on to choose asset classes and specific investments, an investor must consider many issues, including risk assessment and establishing time horizons for each goal.

Risk assessment is rarely considered when the markets are hot and expectations are high. The prevailing psychology becomes, “Gotta get in now!” Certainly, the prevailing winds are powerful, and it’s quite easy to get swept up in the current madness, and eventually blown away in the inevitable downturn. The risk in a given situation is often overlooked because crowd madness may be focussed only to potential money making opportunities. (Can you say “bubble”?)

Doing risk assessment simply means understanding what you may be getting yourself into, but it doesn’t mean you need to sidestep every risk. You couldn’t if you tried. Risk comes in many flavors. To the contrary, risk is something to be embraced. Price changes, up and down, due to both fundamental factors and volatility allow us the opportunity to make money. Our job as long term investors is to acknowledge risk is everywhere, determine if a particular risk fits our outlook and objectives, and act accordingly.

…before plunking down your hard earns on some flight of fancy, there are at least 7 steps you need to take before you decide if it’s the flight you want to board…

How long will you own this thing? Time is a critically important factor in successful investing. Time affects risk, returns and even taxation. If you’re looking for a long term addition to enhance your overall allocation and overall wealth building philosophy, then go to the head of the class! You are a long term investor looking to build long term wealth.

Looking to just hold it until it hits a price target at which point you will sell? Then you’re a trader. Nothing inherently wrong with trading if you know what you’re doing, you have separately apportioned high-risk capital, and its part of a larger overall plan, but naked speculation is truly a 180 from what we’re all about here.

We take a long term view of everything here, but we readily acknowledge that speculators play an important role in the markets. Speculation has its place in the financial universe, it’s just not a good fit for most investors saving for retirement, and this gets truer the older we get.


Stocks, bonds, cash, real estate, alternatives. All are separate asset classes that have specific and unique characteristics. Correlation is the important concept here. The fact that a given asset class will generally move differently than other asset classes is what makes asset allocation a vital tool. The question should never be, “Which asset class should I own?,” but “How much of each asset class should I own?” See the difference?

Committing to own a representative amount of each asset class at all times, in all market cycles, based on your personal risk tolerance and goals, defines the importance of asset allocation. You never have to be “right” in your selection or timing, as these small, active elements each play a lesser role in the outcomes.

…you never have to be “right” in your selection or timing…

Choosing sub-asset classes is where it gets really interesting. Stock can be domestic or foreign, large medium or small capitalization. Bonds can be short or long, high quality or junk, corporate or government. Remember, the task at hand is to make an initial or subsequent security purchase, hopefully a diversified index fund or ETF.

While you’ve gotten this far, with the first five steps under your belt, you’re still staring at a stunningly large universe of possibilities. According to the 2019 Investment Company Factbook, published by the Investment Company Institute, “At year-end 2017, there were 1,569 index-based ETFs with $3.3 trillion in total net assets,” over 72% being domestic US funds. You are attempting to choose one!

If you were employing a core-satellite approach, the core of your growth portfolio may likely be a large domestic stock ETF or fund representing the S&P 500 or Russell 1000 perhaps, with smaller allocations going to small and mid-cap stocks, bonds, real estate and alternative classes like commodities. Optimized allocation models are available in ready-to-go managed accounts, or you can assemble your own, but there is no one right answer for everybody, so we aren’t giving one!


Passive Investing is simply a superior way to invest. Passive investing allows you to be the market, and you will never earn less than the market. In a world of uncertainty, you are unlikely to encounter any “nevers”  as good as this one. Today’s passive investors enjoy the opportunity to create customized and easy to manage portfolios with low cost, diversified exchange traded funds; portfolios that range from simple to complex, and may include everything from the most common of common stocks to sector plays as narrow as marijuana and cryptocurrency.

7-Pay close attention to ASSET LOCATION AND TAXATION

This is one that nearly all investors miss. Almost always. Where you put it counts.

Asset Location is a tax reducing strategy that can create tax alpha, since not all investments are taxed the same way especially when they are optimally located. Optimal location simply means the most tax-friendly location. For instance, while an IRA will eventually be taxed at ordinary income tax rates, assets is ROTH will be tax free at their distribution. (Read Location, location, location! for more detail).


No, you’re not going to launder your money or shampoo your portfolio, but you are going to monitor your portfolio consistently and repeat this process often.

Whether you’re starting from scratch or you’ve been following these steps for years, you will work through the 8 steps for two principal reasons: 1) Checking on the progress of your SMART goals or add a new goal, 2) Periodic rebalancing of your asset allocation model, and 3) Adding new investments to your portfolio.

Okay, you did your homework. You worked through the 8 steps, set reasonable and attainable time-based planning goals, established a strong allocation foundation, considered the risks that you are willing or not willing to accept, considered the right type of tax-friendly accounts to use, and now you’re ready.

You have two choices: Pull the trigger or find an experienced marksman that knows how to safely handle the weapon and hit the target! When in doubt, speak to your friendly Certified Financial Planner professional.

*Each of the preceding 8 Steps include critical sub-steps that will be detailed in my upcoming book “Fix the Investor. Fix the Investments: Your NEW 8 Step Money Paradigm.”  Stay tuned!

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