Individuals and Family Accounts

Profit Sharing, 401K, IRA, Roth IRA, SEP-IRA, Brokerage and Trust Accounts.
All of the above may be choices you have when it comes to investing and your future.  Not only do you have to decide which accounts to put money in, you also have to decide how much money to have in stocks, bonds and cash.  Among stocks, how much should you have in Large Cap, Mid Cap and Small Cap stocks as well as how much in Growth or Value stocks.  Among Fixed Income investments, your choices are Ultra-Short Term, Short Term, Intermediate Term, Long Term and High Yield Bonds.

Other issues are creating a Balanced Portfolio that satisfies your financial objectives within your risk constraints.  Never mind that you may not be aware of your risk constraints because you may not know what they are at this point.  It is my job to assess your risk aversion because your personality is what is innate.  You may want to be conservative, but if your personality is aggressive, you won't be happy with a slow growth portfolio.  On the other hand, if you think you want to be aggressive yet in reality, your personality is not one of taking many risks, you may have a very hard time with a volatile portfolio.

Now, why a Balanced Portfolio or what is a Balanced Portfolio?  I really believe that all people should have a Balanced Portfolio.  So, balance in a portfolio means that the risks are measured and offset as much as possible.  Ultra-short Term Bonds are extremely stable in price, but they only pay a very low return in interest.  However, if you have very high risk stocks like the technology or biotech stocks, these safe, stable bonds balance the risk.  Taken to the academic extreme, Harry Markowitz, a Nobel Prize winner, wrote an article that discussed how to balance risk in a portfolio to create the optimal return for a given level of risk. 

Therefore, Asset Allocation is the process of investing in Stocks, Bonds and Cash to create a Balanced Portfolio.  This works because many of these investments are negatively correlated with each other.  Often, stocks will move up in unison when the economy is doing well and consequently bonds will perform poorly because investors are buying stocks in a frenzy and not buying bonds.  However, the opposite is true when the economy is not doing well and people rush to buy bonds for their safety. 

An Example

Start with a portfolio of $1 million dollars that's invested 60% in stocks and 40% in bonds.  Now, the stock market roars for 5 years straight years and you make 15% return each year on your stock portfolio.  However, your bonds only make 5% each year.  Even still, being a good investor, each year you re-balance your portfolio.  This means that at the end of year one, your portfolio has grown to $1,110,000 because you made 15% on the $600,000 in stocks and 5% on your $400,000 in bonds.  However, now you don't have 60% in stocks and 40% in bonds.  You now have $690,000 in stocks (62%) and $420,000 in bonds (38%).  So, you re-balance by selling some of your stocks and and buying bonds to achieve the 60/40 split between stocks and bonds. 

Fast forward to year five,  You have done the same thing each year with your 15% gains in stocks and 5% gains in bonds to maintain your 60/40 stocks to bonds.  Your total portfolio would be worth $1,685,058 with $1,047,468.6 in stocks and $637,589.6 in bonds.

The Bear Market arrives for the next three years and your stocks drop 15% each year, but your bonds gain 10% during the Bear market.  After year one of the Bear, your stocks are now worth $859,379.7 with a loss of 15%.  Your bonds are now worth $741,425.6 with a 10% gain.  Your balance of stocks to bonds is now 54/46.  Being the good soldier, you rebalance by selling some bonds and buying more stocks to achieve 60/40.  And you do the same each of the next two years during the Bear Market.  At the end, your portfolio is now worth $1,444,726.80.  A loss of $240,331.4 from the top, but a gain since starting with $1 million eight years earlier of about 45% since the beginning.

What would have happened if you had all stocks and no bonds through the eight years?  You would have more than doubled your money at the top, but you would have lost $776,132.50 over the next three years of the Bear Market and you would end up at a total of $1,235,224.70 or a gain of about 24% since the beginning.

Now, as you see in the example above that the correct way to invest is to create a diversified, balanced portfolio.  A balanced portfolio recognizes that over the long haul no one knows what asset classes will perform best and through diversification, the risks are balanced and controlled.

Financial Objectives

Another aspect of your financial affairs that I will help you with is to create realistic goals.  These may include the following:

As for creating your own personal financial plan, I am more than I able to create one for you.  However, I prefer to lead and guide my clients to create their own plan because each person is an individual with different goals and objectives.  By preparing a financial planning document for you, the client loses the self-actualization necessary in order to take control of their financial lives  I will invest your money appropriately and work diligently for you and I have shown you I have the knowledge and experience to do my part.  If you want to achieve your goals, you are the most important person in making it reality. 

Advantages of using Lotzer & Co., Inc.