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Many attorneys possess the ability to do their own financial planning, and many do it. However, because the legal profession and the financial planning professions are labor-intensive, these lawyers may find that it’s challenging enough to stay on top of their own profession without learning how to do someone else’s. Especially in today’s uncertain markets, it is best to go to the experts. A certified financial planner knows what kind of investment planning works best for successful, busy people. Reaching success in investing over the long term requires knowledge, expertise, access to information, discipline and a historic perspective. The country recently experienced a period when this historic perspective was lost to all but the most disciplined professionals. Many people who lacked the guidance of professional advice over-allocated assets to growth stocks — especially in the technology area — only to see substantial gains totally wiped out within a relatively short time. One way to avoid this misfortune is to have a diversified portfolio that is invested for the long term. The average investor, according to a recent study by the Frank Russell Co., tends to have a frame of reference of about three years. This is part of the reason so many people lost money in the current bear market. In 1997, ’98 and ’99, the frame of reference was a period when growth stocks substantially outperformed value stocks. Those people who did not have a plan tended to over-allocate to that asset class, with devastating results once the markets began to change. One’s investment strategy should be kept simple. Busy attorneys should first take care of all the basics. Have a will and trust, if needed, and all estate planning completed. It also is necessary to have an emergency fund with three to six months’ worth of salary invested in CDs, money market funds or other types of funds in which the value doesn’t fluctuate with the markets. Lawyers should keep their risk management program up to date and have the proper amount of disability, life and liability insurance and, if necessary, long-term care insurance. If these things are in place, then it’s time to move to investments. The first investment step is to decide on the appropriate amount of money to invest in some type of liquid investments (easily converted to cash, such as stocks and bonds) and the amount to invest in illiquid investments (e.g., real estate, partnerships). While there is no accepted rule of thumb, it makes sense that as a person’s net worth increases, he or she can afford to have more money in illiquid investments. For example, if one’s net worth is $100,000, most investments should be in liquid investments. However, if one’s net worth is $1 million, probably up to 20 percent to 35 percent may be invested in nonliquid investments. Stocks and bonds are part of the liquid investments. The best way to invest in these assets, especially for busy people, is through mutual funds. Mutual funds provide professional management, diversification automatic reinvestment of capital gains and dividends, and daily pricing. An old rule of thumb was to have the same percentage of assets in liquid investments, primarily bonds, as one’s age. For example, a 55-year-old should have 55 percent of assets in fixed-income investments. Is this still a good strategy? Not really. In today’s investment world, the majority of assets, probably at least 60 percent to 65 percent, should be invested in equities. The fixed-income portion of the investment portfolio (bonds) would be about 35 percent to 40 percent. Today there are many types of bond funds, and selecting the right type of fund is something best left to the discretion of an investment professional. MUTUAL FUNDS Twenty years ago, only a few types of equity funds existed: growth, aggressive growth, equity income and balanced funds. Since that time, the “art” of investing has become much more sophisticated. Today, mutual funds are divided into several different categories. One should understand the four basic types of stocks: stocks of large companies, generally referred to as large-cap stocks; stocks of small companies, known as small-cap stocks; in between, the stocks of medium-sized companies, known as mid-cap stocks; and international, or stocks of companies outside the United States. Additionally, different fund managers have different styles. Some are value investors who invest in value stocks, while others are growth investors who invest primarily in growth stocks. This establishes the following asset classes: large-cap growth, large-cap value, mid-cap growth, mid-cap value, small-cap growth, small-cap value, international growth and international value. Determining how much to invest into each asset class depends on many factors, such as one’s specific goals and investment objectives, risk tolerance and investment time horizon. Based on these criteria, a good financial planning professional can assist in allocating appropriately into each of these asset classes from the array of more than 7,000 mutual funds. Once the investment portfolio reaches an appropriate size, alternative investments may be added, ones whose returns are noncorrelated with the U.S. stock and bond market. Some examples are real estate, equipment leasing, venture capital and hedge funds. These investments should be approached with some degree of caution as they tend to be illiquid and have risks associated with them that are different than the types of risks associated with stocks and bonds. Much more information goes into compiling an effective investment portfolio. While at first blush it sounds simple, the few topics touched on in this article show that it can actually be quite complex. The best way to ensure results over the long term is to have a fully diversified portfolio across several different asset classes and to re-value these assets as necessary. A common mistake people make is that they do not compare “apples to apples.” For instance, an individual may own a large-cap growth fund and a small-cap value fund, and the returns on these two particular funds may be different in any given year. Many people will sell the fund that has not been performing. Unfortunately, this can be a huge mistake because the asset class that has been under-performing may be the next asset class to perform well. Large-cap growth funds have to be compared against other large-cap growth funds, and small-cap value funds against other small-cap value funds, etc. To summarize briefly, one should establish an overall financial plan. Once this step has been completed, determine investment objectives and set a strategy that is consistent with those objectives, combined with risk tolerance, time horizon, and desired or expected return. Then, determine the appropriate money amounts for investment into each asset class, while continually monitoring these investments over the long term. Monitoring is important because it often is necessary to rebalance the portfolio. If a person’s initial plan established maintaining 20 percent of assets in large-cap value funds, and this asset grows to become 40 percent of the overall portfolio, 20 percent should be re-allocated to other asset classes. A simple investment strategy is best. And while this process may seem complicated to some, a competent, certified financial planner will be able to establish an appropriate plan for each individual and keep it straightforward and understandable. Bill Carter is president of Carter Financial Management in Dallas, which assists clients through coordinated use of tax, investment and estate planning tools and techniques in setting and achieving their financial goals and objectives.

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