The Funnel Approach to Investment Management

Photo by: flickred

Photo by: flickred

One of the major components of a financial plan is a complete, objective analysis of your investment portfolio. Note, an portfolio analysis is only one element of a comprehensive financial plan. If your financial advisor presents you with a review of your investments but not a retirement, insurance, estate, and tax analysis, you do not have a truly comprehensive financial plan.

A financial plan should be objective in nature. If the investment section of the plan revolves around pitching certain products, you may be working with a commission-based financial advisor. From my experience, the best comprehensive financial plans are developed by fee-only financial planners who are not motivated to sell products.

The investment section of a financial plan should begin with general, basic financial principles, such as determining an appropriate asset allocation between stocks, bonds, and cash. Identifying the appropriate allocation is mainly a function of three things: the return you need in order to achieve your retirement goals, when you will need the funds invested, and your risk tolerance. Of course, there is a trade-off between risk and return, and every investor needs to know where they lay on this continuum so they can stick to their investment strategy during the bad times without the temptation to sell at market lows. Before determining the appropriate asset allocation, focusing on more specific investment issues such as which stocks to invest in is likely a useless and dangerous task.

After identifying an asset allocation, the investor can now narrow their focus. The next step is to develop a diversification strategy. For instance, suppose the investor decided on a 60% stock / 40% bond portfolio. How much of the stock portion of the portfolio is going to be invested in large cap, mid cap, and small cap stocks? How much will be invested in growth vs. value stocks? How much will be invested in U.S. vs international vs. emerging market stocks? Further, what portion of the bond portfolio will be invested in corporate bonds, government bonds, and international bonds? How much will be invested in short vs. intermediate vs. long term bonds? What about TIPS (Treasury Inflation Protected Securities)? The diversification strategy needs to be specific, and the investor needs to determine a consistent schedule to rebalance the portfolio.

An example of how diversification can help: during the late 1990’s, growth stocks performed extraordinarily well while value stocks illustrated muted performance. Consequently, many investors placed large bet on growth stocks at the turn of the century. Additionally, many investors forgot or decided to not rebalance their portfolios in an attempt to capitalize on growth’s amazing run. Guess what stocks were hit hardest during the bursting of the tech bubble? Meanwhile, value stocks not only held their value, but experience significant gains. In fact, an investor who had a balanced portfolio likely lost very little money during the early 2000’s, and may have even seen their account balances rise.

Only after committing to an asset allocation and a diversification strategy is an investor ready to again narrow their focus and evaluate certain stocks, bonds, mutual funds, or ETFs.

About the author

Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as and (by The Wall Street Journal). Additionally, Lon is an expert author at Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or Learn more about Net Worth Advisory Group at and visit Lon's blog at

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