Rules of the Game: Shaping Your Investment Personality

Sometimes, when I bring up the topic of financial planning, people misunderstand. It may sound as if I'm recommending that you cut coupons or create one of those Excel spreadsheets, with all your spending budgeted down to the penny.

That's not even close to what I mean when I say "financial plan."

Instead, the plan I'm discussing is primarily designed to provide insight into pre- and post-retirement income streams. How should taxable and qualified accounts be drawn down for retirement income? How do Social Security strategies factor in? What kind of investment risk should an individual or couple be taking?

It's that last question that most often leads to the discussion of specific investments. Of course, that's where many people prefer to jump in first, without any road map as to where they should be headed.

This brings me to the remaining two questions that investors should ask themselves when they take on portfolio management. Last week, I wrote about three of the questions: Should you hire a manager or attempt to take on all the duties yourself? How should you allocate your assets among stocks, bonds and cash? (This question assumes you already understand the amount of risk you can take to build or protect your retirement nest egg.) Finally, within those categories, can you determine which assets are most appropriate for your situation?

The next thing to consider is whether an active or passive approach is best for you. I've recently heard many proponents of so-called "passive" investing refer to the approach as "market-based." That's a better descriptor, given that portfolios require rebalancing, depending on strength or weakness in any given asset class.

For many investors -- especially those with a trading bent -- the concept of market efficiency can often seem counterintuitive. There's a nonstop drumbeat of media and traders trying to convince us that we can beat the market if we just do enough research, identify the right chart patterns or fundamental indicators or devote enough hours to timing our trades precisely.

At least three-quarters of active fund managers can't beat their benchmark index in any given year. Yet individual investors, armed with a list of technical indicators and perhaps some basic fundamentals, can do better? Doesn't it stand to reason that, if there were some magic market-beating formula, the professional managers would be using it?

Finally, when should you add to the investments in your portfolio and when should you take some profits?

Back in my trading days, that answer was always easy: Use some basic moving-average and volume indicators to determine when it's time to take money off the table, or to add to positions.

But managing assets within an overall portfolio is not the same as timing the trade of Green Mountain Coffee Roasters (GMCR) or Fleetcor (FLT). Is it possible to get lucky on some trades, and walk away with profits? Of course!

But market timing is an insanely risky way to try managing your nest egg. Rebalancing, meanwhile, is an entirely different activity. By nature, rebalancing is an active decision, not a passive one -- and, if you're not careful, even that can lead to overtrading.

At the time of publication, Stalter had no positions in the stocks mentioned.