FAQ

1. Why should an investor consider the use of a professional financial advisor?
2. What is Asset Allocation?
3. Why is Asset Allocation so important?
4. What investment strategy do you follow in making recommendations to clients?
5. How can I determine my risk profile and investment objectives?

 

 

 

 

 

 

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Why should an investor consider the use of a professional financial advisor?

A financial advisor can become a trusted partner for the long run.  He or she will come to understand you and work with you, to help you reach a lifetime of financial goals.

    Here's what you should expect from the beginning...

• An Analysis of  Your Financial Situation. Your advisor can examine your current investments, income and tax situation, to analyze your current level of "fiscal fitness."
• Clear Definition of  Your Goals.  Together, you and your financial advisor can formalize your goals, both for the short term (such as buying a new home in the next few years) and long range (college for children and your retirement).
• An Individualized Strategy to Help You Reach Your Goals.  Most likely your investment program will include a combination of investments that address your time and safety requirements.  Ultimately your portfolio will be uniquely yours -- designed in a way to help you meet your financial goals both now and in the future.
• Regular "Financial Checkups."  You and your advisor should periodically review your investments to be sure you're on track to reaching the goals you've set.  You should stay in touch with your advisor during the different events of life.  Marriage, new babies, retirement, aging parents or a new job -- all of these could warrant a change in your investment direction.

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What is Asset Allocation?

Asset allocation is the process of dividing up your money among different investments.  The various places you can invest your money -- stocks, bonds, real estate, cash and hard assts, for example -- are called asset classes.  The aim of asset allocation is to find the ideal combination of asset classes to balance your expectations for returns with your concerns about risk

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Why is Asset Allocation so important?

Asset allocation helps you:

• Diversify your holdings
• Balance risk and reward
• Plan for the long term

One of the best ways to manage overall risk and enhance returns is to diversify your investments.

Diversification is a way to lessen the risks of investing by spreading your money over a greater number and variety of investments.  You might think of a farmer who, instead of staking the family's livelihood on a single crop, plants several different crops and raises some livestock for good measure.  That way, if pests destroy one crop or weather another, the farmer will still have a source of income.  

Investing works the same way.  If you put your entire savings in only one stock, it's little better than a farmer planting only one crop and hoping for the best.  Just like that farmer whose single crop fails, if  your one stock crashes and loses half its value, you've got nothing to fall back on.  But if that stock is just one of several in your portfolio, your overall loss may be smaller and far less significant to  your overall portfolio.

We need to keep in mind that while diversification may help reduce volatility and risk, it does not guarantee future performance.

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What investment strategy do you follow in making recommendations to clients?

Your portfolio strategy begins with a personalized investment analysis, then graduates through the portfolio construction process, in which multiple asset classes, multiple style allocations and multiple money managers are combined to meet your investment objectives.

The result is a well tuned, five step asset management process designed to respond to your individual needs while also responding to the dynamics of capital markets.

A five-step asset management process to a successful financial future

1. Through personal consultations with you, we develop a personal profile of your individual investment needs and objectives, time horizon, and attitude toward investing.
2. We develop a personalized asset allocation policy based on your needs and objectives as identified in Step 1.  This policy attempts to maximize your investment returns relative to your risk tolerance through the carefully diversified allocation of your investments.
3. Your asset allocation policy is implemented by investing in a well-diversified portfolio and is managed by professional money managers.
4. Your investment portfolio is carefully monitored on an ongoing basis to ensure that it remains consistent with your agreed-upon asset allocation policy. If the relative value of investments in your portfolio changes enough to become inconsistent with this policy, it is rebalanced.
5. We will communicate with you on a regular basis and provide a comprehensive reporting package including account level performance reports and statements providing details of your account -- including total asset value and a record of all transactions that occurred during the reporting period.

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How can I determine my risk profile and investment objectives?

Every investor is an individual, with different needs and different objectives.  Whatever your objectives -- wealth preservation, asset growth, current income or minimizing taxes -- we will help you determine whether you need investments that produce income, growth, or a combination of both.  

It is also important to understand your attitude towards investing.  That is, how much risk, or variability of return, are you comfortable with?

The following is a risk tolerance quiz that you can take to provide you with a basic idea of your risk profile:

1.  A month after you purchase a stock its share price rises by 50%.  You can't find out why it rose so dramatically, what would you do?

a. Buy more, it may go higher

b. Hold onto what you have hoping for a further gain

c. Sell it immediately

2.  You inherit your mother's beach house, mortgage free.  It has become run down, but beach property continues to appreciate.  You could rent it as is for $1,200/month or renovate it and rent it for $1,800.  You would have to take out a small mortgage on the property to finance the renovations.  You:

a. Take out a mortgage and renovate the beach home.

b. Rent it as it is.

c. Sell it now, rental property seems like a hassle

3.  Your best friend wants to start a new business, but she needs some capital for start-up costs.  You think her new business idea really has potential.  She wants you to invest $40,000 (which you currently have), in return you would own 30% of her company.  If everything goes as planned, you could get back 40 times your investment in three years, on the other hand four out of five small business fail within the first three years.  What would you invest?

a. Nothing at all and wish her well.

b. Tell her you will work with her and try to get financing through some conventional means.  Invest no money.

c. Invest $20,000.

d. Invest the $40,000 and if things seem to be going well tell her there is more where that came from.

4.  You go to Las Vegas with friends and lose the $300 you had allocated for gambling.  What do you do?

a. Quit gambling and enjoy the other activities.

b. Decide $100 more may just win your $300 back

c. Notice that one of your friends lost $600 before winning it all back and allocate another $300

d. Throw caution to the wind, the more you lose the better the chances of winning!

5.  An investment loses 14% of its value less than a month after you buy it.  The fundamentals of the investment and  your financial goals have not changed, you:

a. Hold on to the investment.

b. Sell it, you've worried enough

c. Scrape up some money and buy more, if it looked good before, it's a great buy now.

6.  The small computer company you work for is raising money by selling stock to employees.  If you buy the stock you will not be able to sell it until the company goes public.  Management plans to go public in three years.  You like the company and feel that if things continue as they are, and it goes public, the share price could be 20 to 30 times higher than what you would have to pay now.  You are also aware that the company could never go public making your shares worthless.  How much would you invest?

a. Nothing.

b. One to two month's salary.

c. Six month's salary.

d. Borrow as much money as you can, this is the opportunity of a lifetime.

7.  You are on a TV game show and must decide whether to go on or take your $10,000 winnings and quit, you:

a. Take the money and run.

b. Take a 20% chance of losing it all but winning $50,000

c. Take a 50% chance of losing it all but winning $75,000

d. Take a 90% chance of losing it all but winning $100,000

8.  You decide to invest in a stock fund for a long-term goal, you choose:

a. A stock fund with a long stable performance track record, it is never the best performing or the worst.  It invests in large well-known companies that pay dividends.

b. A stock fund that is only three years old but has outperformed all similar funds by 8% for the past two years.  It invests in small unknown companies.

c. Both, you divide your money between the two funds.

9.  What would you be more excited about?

a. You win $1,000 by being the 15th caller on a radio show.

b. Your grandmother sends an unexpected gift of $1,000

c. A risky $100 investment you made last year returns $1,100

d. $1,000 is $1,000 - you're excited, no matter how it came to you!

Scoring

Total your score using the following point system:

1. (a)4  (b)3  (c)1
2. (a)3  (b)2  (c)1
3. (a)1  (b)2  (c)4  (d)9
4. (a)1  (b)2  (c)4  (d)9
5. (a)3  (b)1  (c)5
6. (a)1  (b)2  (c)6  (d)8
7. (a)1  (b)4  (c)6  (d)9
8. (a)1  (b)9  (c)5
9. (a)2  (b)1  (c)6  (d)1

30 points and over:  Risk Taker/Acceptor

The closer you are to 58 points the more adventuresome investor you are.  You need to be careful that you don't fall into the trap of thinking that more risk automatically means a higher return.

13-29 points:  Risk Minimizer/Middle of the Road

You are willing to take calculated risks with your investments and realize the need for diversity.

Below 13: Risk Avoider

You are conservative in your investment philosophy.  If you don't develop some tolerance for investment risk your biggest risk will be inflation.  As you develop the confidence or desire to take on more investment risk, go slow.  

 

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Koehn Financial Group, Inc.
Copyright © 2001. All rights reserved.
Revised:

Questions?  Comments?  Email koehnfinancial@mindspring.com