A Guide to Successful Investing

Any investment plan must flow from the needs and goals of the investor. A common goal is determining how much is needed at retirement to fund an increasing income you cannot outlive. Once that figure is established, it’s time to get invested. I recommend investors use a “layered” approach that, step-by-step, guides your investments.

How much liquidity do you need? In other words, what percentage of the portfolio needs to be available on a moment’s notice in the form of a check or wire that can be sent to the client? In your regular investment account you should have enough liquidity available to pay for six months of living expenses. Inside your 401k or IRA you should be fully invested.

How much of the portfolio will be in stocks, bonds and cash? The further you are from retirement, the more stocks (or stock funds) you should own. You need a good dose of stocks in your portfolio because you need to generate growth. At the end of the day, bonds don’t grow but stocks can. For example, if you are 20 years form retirement, a practical allocation could be 85 percent stocks and 15 percent bonds.

How do you invest among stocks and bonds? First, let me say that I favor investing through funds, not individual stocks and bonds. Funds are more diversified and therefore “safer” than individual securities. You can invest either through mutual funds or Exchange Traded Funds (ETFs).

Where do you invest among the stock and bond fund universe? My favorite hockey player of all time, Wayne Gretzky, once said, “A good hockey player skates to where the puck is. A great hockey player skates to where the puck is going to be.” I would like to paraphrase that and add, “A good investor skates to where the opportunity is. A great investor will skate to where the opportunity will be.” For example, when the housing market crumbled in 2008, the stocks of homebuilders were crushed. They fell, on average, 80 percent. For the next three years, there were only 350,000 homes built per year. Replacement stock needs to run at 1.2 million homes per year. By the end of 2011, the stocks of many homebuilding companies were still trading about 80 percent below their 2008 highs. This looked like a good thematic opportunity. Now, homebuilder funds are up triple digits from their 2011 lows.

Doing a little research and learning what is happening around you are important factors to creating a successful investment plan. Make it a point to find out what will be the next big thing. It’s also vital to have a sell discipline. Many investors lost their shirts in 2001 and 2008 because they had no plan in place for a crumbling stock market. You can use trailing sell-stop orders, target prices or another method. The important thing is to have a plan in place.