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Seven Resolutions for a Prosperous Investing Year

The following article has been authored by Benoît Poliquin, Vice President and Portfolio Manager at Pallas Athena Investment Counsel. Benoît holds both the Chartered Financial Analyst and Certified Financial Planner designations. He has also taught at the University of Ottawa’s Telfer School of Management in the areas of Fixed Income investments, Derivatives and International Finance.

Benoît Poliquin, CFA is Vice President and Portfolio Manager at Pallas Athena Investment Counsel

Establish your goals:

Champions chasing glory always have a goal. Whether it’s a team sport or an individual event, there are always goals. You might not be chasing this year’s Stanley Cup, but you should set financial goals for yourself. Be sure that these goals encompass tasks you can actually control.

Examples of relevant financial goals can be budget minded (“I will set aside 10% of my income”) or debt related (“I will pay X% of my mortgage”). You also need long term financial goal (the next five years) and shorter term goals (next quarter, three months).

Make a Plan:

Take a page from successful sports teams. The first thing the coaching staff will establish is the ultimate goal, which is most likely the championship. From there, the ultimate goal will be broken down into more decisive checkpoints, like the number of games to be won each month. From the number of games to be won, the goals will be further broken down for each player - what are their goals for the month, the half season and eventually the entire season.

So start from your ultimate goal and breakdown each milestone. Once you have the milestones, establish a plan to reach them. An example would be to have the ability to retire by a certain age. If you are a business owner, you will have to incorporate your business into your long term goal. Will you need to sell it, merge it or shut it down? How does your business impact your personal finances?

Once you have the long term goal in mind, you’ll need to establish shorter term goals such as being mortgage free, your retirement savings plan being on track (are your RRSP contributions maximized? How about your TFSA?). I strongly encourage a positive reinforcement strategy. For each milestone reached, establish how you will reward yourself but avoid splurging money as the reward!

Finally, establish your investment plan. How will you be investing? Where will you be investing? Do you have an exit strategy? How will you be selecting your investments? It is very important that you build your investment decision framework so that when greed or fear cloud your vision, you can rely on your solid framework to guide you. You can be sure of one thing: you will encounter both fear and greed next year!

Draft A Team:

It takes a team to win championships and so you should also surround yourself with the best players you can find. If you prefer to direct your investments yourself, ensure you have the proper information sources at your disposal to make intelligent and well researched decisions.

Even go-at-it-alone investors need help on taxation, wills and estate issues and insurance. Take the time to research and find the very best advice you possibly can because your financial success will depend on it.

When assembling your supporting cast of experts; investment advisors and/or portfolio managers, tax specialists, trust and estate lawyers and life insurance professionals, you have to be clear on what you are looking for. Are you looking for a turnkey solution or a source of knowledge? If you can do this, you’ll be able to focus on the value of their expertise, not necessarily on getting the “best deal”.

Investing and Speculating:

Eventually, the excess capital you have accumulated will have to be put to work. Before you proceed with your next investment in 2011, you’ll need to remember the difference between investing and speculating. If you are investing, it’s after the culmination of your research process that determined your likelihood of profit and the probability of the return of your invested capital as well as the time horizon of the endeavor.

If you are putting money into a stock, fund or real estate deal on whim, a recommendation or “gut feel” type of research, than you are speculating. Your success probably hinges on some event that you cannot control nor foresee with any kind of certainty. Speculation is neither illegal nor immoral but rarely will it help you reach your financial goals. It should be regarded as a form of entertainment and the sums at risk should reflect this.

Do Your Homework:

This is the time of year where prognosticators are hard at work telling us what will happen next year. You can be sure that most of them will be wrong and only a select few will be correct. The other truth is that you cannot tell which will be the accurate ones.

There is no substitute for homework when it comes to investing. When doing your research, you should avoid looking at the future with the rear-view mirror. What worked last year probably will not fare as well next year just as last year’s dogs will be replaced by a new set of poor performing stocks.

Go back and look at your investment plan so you can avoid letting recent market events cloud your judgment.

Review Your Situation:

Many investors equate understanding your portfolio to looking at it every day. Some will go as far as extrapolating short term past performance of a particular stock or the overall portfolio. This type of behavior is counterproductive as it will stoke the emotions of fear and greed and will promote making irrational and emotional investment decisions.

Peter Lynch once said that he had a very simple system to track his investment ideas: notes. He would write down the reasons why he purchased as stock and why he would sell it and at what price. As he reviewed his positions, he would update his notes. One of the benefits of this methodical approach is to insulate yourself from recent market events clouding your judgment.

In every portfolio, certain positions will go sideways. In investing, what you cannot predict is usually what will hurt you the most; armed conflicts, political events or reactions to surprising economic data are impossible to foresee. I recommend you review your positions at least monthly. However, do not focus solely on the market performance, but rather revisit the reasons why you invested in the first place.

When a position or event the whole portfolio is going the wrong way, many investors will simply ignore the situation. In times of crisis, there is always opportunity. If you ignore the difficult situation for psychological reasons, you might be overlooking a great money making opportunity. “A crisis is a terrible thing to waste”.

Focus on the Long Term:

This is probably the most overused cliché in the financial services industry. So let’s define the long term: If we agree that most economic cycles last around four to five years, then in my mind, that is the definition of the long term. So if your strategy, investment advisor, portfolio manager or investment is not reaching the goals you had set for yourself, its time to reflect.

Perhaps your goals were unrealistic or maybe there have been extenuating circumstances. During your reflection process, it is important to remember that there is always someone that had made more money or seems to have developed a way to grow the proverbial money tree. Chances are, that is probably not the case. So change for the sake of change is not the answer.

You must review your goals and your strategy but the first step is to develop them!

Having said that, here’s to a prosperous 2011 …..

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