The client determines the investment goals, the amount and timing of savings, and the amount and timing of withdrawals.
A long-term investment plan is needed to guide specific investment decisions in support of the goals. The plan should have a time horizon for each investment goal. The plan should include a risk assessment that includes investment risks-and also other risks such as inflation, unexpected health care costs, etc.
Projected returns should be looked at in constant dollars and inflated dollars. Constant dollars often provide greater insight for long-term projections. No one can predict short-term market movements.
An investment portfolio should be diversified (to reduce unnecessary risk) and efficient (to increase returns for a given level of risk). This usually means a mix of cash equivalents, fixed income securities, US equities, non-US equities, and real estate securities.
Investment expenses that do not increase returns or reduce risk should be minimized. Examples include transaction expenses, sales commissions, mutual fund expenses that add no value, insurance industry investment product expenses that add no value, unnecessary income taxes on investment income, unnecessary estate taxes, and unnecessary probate expenses.
If an asset class or industry sector has recently had investment returns significantly above or below the historic, long-term return level for that class or sector, it is probable that future returns will eventually move towards the historic average. This probability increases the longer the time, and the greater the amount, that the returns have deviated from the historic level.
Studies have shown that, as a group, value stocks (those which have a price that is a low multiple of projected earnings) and small capitalization stocks (small companies) have earned higher risk-adjusted returns, over the long term, than growth stocks and large capitalization stocks. Portfolios over-weighted in these categories will probably do better over the long-term.
The intrinsic value of a security is the present value of future cash flows to the owner of the security. If the market price for a security deviates significantly from the estimated intrinsic value, then an investment opportunity exists.
Options can be used to reduce risk (for a known cost) or to increase risk (for the possibility of higher returns). Options are a means of transferring risk between two parties.