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Where and how to Start Investing?

Where and how to Start Investing?

September 06, 2023

 Where and how to Start Investing?


Are you ready to start investing?  Do you have a strong cash position and cash strategy?  Do you have a benefits and insurance strategy to protect your cash strategy?  If so, you are ready to for the next step in financial planning.  Building an investment strategy.  

Reflecting on the human experience and average financial capacity of consumers; investing is a luxury, an act few get to meaningfully participant.  Over 89% of all US stocks are held by the wealthiest 10% of Americans.  If you have the capacity to invest, it means you have a vision and/or confidence to put money to work you shouldn't need for years, maybe even decades.  You have or are aspiring to maintain financial discipline with the purpose of building wealth to fund a goal or replace future income.  

 What is an Investment Strategy? 

An investment strategy defines "why" you are investing and how you intend to invest to meet an objective.  It could be for retirement, semi-retirement, a rainy day fund, higher education expenses, a second home purchase in 10 years, money to start a business or buy a business.  There are thousands of reasons to invest and it is important to understand and define what the purpose of each investment.

Having a purpose will help you and your advisor find and determine the following: 

  • How much to invest to meet the objective.
  • What account type(s) would be most efficient to invest for the goal. 
  • How much risk do you need to take to meet your goal. 
  • What types of investments are best suited and have the potential to generate the required return to meet that goal.  

If we are investing for a known expense, that expense needs to be 4-6 years or more in the future.  Why? Because taking market risk for a known expense inside of 48 months is risky and typically not in your best interest or appropriate.  After you have a stated objective, it is time to put together an Investment Policy Statement.  


What is an Investment Policy Statement? 

 Any Investment Policy Statement (IPS) is designed and built, taking into account, factors and assumptions applicable to your unique situation and your personal investment objectives.  It is a summary of the investment philosophy that will guided you and your Advisor in developing your portfolio.  Key points you will find in Investment Policy Statements are: 

1) Asset Allocation 

2) Portfolio design 

3) Investment research and access 

4) Portfolio construction

5) Tax management 

6) Risk management 

7) Delegation and defining of responsibilities 

 An IPS will be informed by completing the following tasks.  It is important to review and revising the output in regular intervals using a rules based approach to avoid or reduce the chances of behavior errors and technical mistakes. 


 Building an Asset Allocation

Research shows that this important first step accounts for the majority of variation in portfolio returns (over 80% according to Roger Ibboson's research).  Your advisor will structure an allocation designed to serve your financial plan, with the potential to meet your objectives.  The IPS establishes the target asset allocation, which determines the percentage of the portfolio allocated to different asset classes, such as stocks, bonds, cash, and alternative investments.  With additional detail into what specific types of stocks, bonds and alternatives to select.  The asset allocation should align with the your objectives, risk capacity and risk tolerance.


Portfolio Design

The IPS provides guidelines for selecting and managing investments. It may specify acceptable types of securities, sectors, geographic regions, or specific investment vehicles. It may also define any restrictions or limitations, such as avoiding certain industries or adhering to ethical or socially responsible investing principles.


 Investment Research and Access

Who and how to perform investment research to select investments.  Who is responsible to monitor selected investments to ensure they are executing as advertised and are still able to generate meaningful returns to serve their purpose in your portfolio.  While also being mindful of changes in market offerings, execution, pricing and operational function.  


 Portfolio Construction

Portfolios at Sterling Edge Financial consist of multiple levels of diversification and are designed to optimize return while managing risk.  Those levels are: 

  • The top level includes a mix of asset classes like equities and income-generating securities such as bonds.
  • The second level consists of multiple sub-asset classes, styles and tilts, like large cap stocks, small cap stocks, growth, value and high profitability.
  • The third level demonstrates the geographic diversification of portfolios.
  • The fourth level represents the ETFs, mutual funds, individual securities or non-standard asset classes that drive returns with reduced correlation to the stock and bond market.  Such as interval funds, REITs, preferred stocks, convertible bonds, commodities, private equity and private placements.  
  • All levels are monitored and adjusted based on changes in the markets, economy, expected returns and risk.

Investment Management - executing the IPS

The IPS describes the responsibilities and duties of the investment manager or advisor. It may include details about the investment manager's authority, monitoring and reporting requirements, and any specific investment strategies or techniques to be employed.


Tax Management

The investment process includes techniques designed to help you keep more of what you earn. Effective tax management can help protect wealth and maximize after-tax returns. In fact, if not managed carefully, taxes can reduce your after-tax return by as much as 60%.  Key processes to manage tax obligations include:

Account type 
Security selection 
Tax-lot accounting 
Tax-loss harvesting 
Gain-loss offset
Managing the holding period


Review Schedule.

How often and frequency the account(s) should be reviewed  Evaluating the portfolio's performance and progress toward stated goals. It may specify the reporting requirements, including the frequency and content of performance reports, and the frequency of portfolio rebalancing.


In Closing

If you are managing your investments on your own or with an advisor, your investment strategy will be guided / informed by your financial plan.  

Having a rules based investment strategy requires time, effort, energy, attention, process management, execution and regular review.  It is easy to understand why so many consumers outsource financial management to professional management given the amount of time, rules and expertise required to execute and maintain a plan over time.  


Are you looking to outsource your investment management?  If so, reach out to Sterling Edge Financial to learn more about our investment services, strategies and special offerings.  


Investment Strategy Meeting - Schedule Here

Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Diversification and asset allocation strategies do not assure profit or protect against loss