Why You Should Consider a Personal Investment Plan?

Why plan your investments?

The overwhelming majority of people could not explain why they own the investment mix that they have or even accurately define their tolerance for risk. This causes people to invest in an ad hoc random fashion, without rhyme or reason. The result is less than desirable investment returns. Worse yet, many people continue to place their assets into guaranteed investments because of a lack of trust or understanding. Most often this will lead to financial failure. At Wilbanks Securities, our goal is to help you understand the three keys to successful investing, which are diversification, defining risk tolerance, and determining the appropriate asset allocation.


The goal of diversification is to reduce risk while increasing the overall return. This is done by investing in different asset classes which do not exhibit similar characteristics.

Two investments that behave in a like manner and that have similar return patterns over time achieve very little diversification and are said to be positively correlated as shown below.No Diversification

Investments A & B increase and decline in lockstep. Owning one is as good as owning both. These two investments provide little diversification. For example, two computer manufacturers. Investments that have random or negative correlation allow for the necessary diversification that investors need.

Investments C & D accomplish diversification. Notice that these two investments do not Complete Diversificationincrease or decline in lockstep, although they are both going up over time. This tends to smooth the volatility of the overall returns of both investments combined, which reduces the risk to the investor. For example, a snowblower and lawnmower manufacturer.

Risk tolerance

Each Person has their own comfort level, the level of risk that they are willing to accept. Risk is generally defined as the degree of volatility, or standard deviation, in a portfolio. At Wilbanks Securities, we do a careful risk assessment to determine the appropriate risk level for each client.

Harry Markowitz developed what is known as Modern Portfolio Theory, for which he won the Efficient PortfolioNobel Prize.Mr. Markowitz found that the range of returns investors experienced followed a pattern, and at any given level of risk that an investor was willing to assume, there was a certain combination of asset classes that would have maximized the returns over time. This point for any risk level is called the efficient frontier.

Any investment portfolio not on the efficient frontier is an inefficient portfolio, meaning that a different combination of asset classes would have performed better at that particular level of risk.

You could think of asset classes as baskets of different kinds of investments, with like kind investments in each basket. The key is not to put all of your eggs in one basket! Large company growth stocks would be one asset class or basket, undervalued large companies or large company value would be another asset class. Others would include: small company growth and small company value, mid-size company stocks, international stocks, emerging markets, corporate bonds, high yield bonds, government bonds, T-bills and cash, as well as several others. Thus, the goal is to understand your risk tolerance to determine the proper allocation for you between these investment classes.

Asset Allocation

The next step is to determine the investment mix or percentages of these various asset classes that would have maximized your returns in the past. We then develop and propose a portfolio uniquely tailored for you. This is the science of investing. We take other factors into consideration as well such as your tax bracket, retirement needs, your personal situation and funding capabilities, etc. This is the art of investment planning. The important thing is to know your risk tolerance, and this determines the combination of these asset classes you should own.

Plan your investments like the pros

These principles are the underpinnings of Modern Portfolio Theory and Asset Allocation. This is our investment philosophy at Wilbanks Securities. It allows us to create an Investment Plan or an Investment Policy Statement for you using sophisticated software tools. This will provide you with a method to the madness of investing, so you can know how you should be investing both in your personal programs (mutual funds, IRA’s, etc.) and in your 401-k and company plans. And you will know what percentage you should invest in the asset classes available in your investment programs.

Potential benefits you can receive from proper investment planning

1. Increased compound returns by attempting to reach the efficient frontier.

2. Increased returns from re-balancing your portfolio which systematically forces a discipline of selling high from     asset classes that have increased and buying low into  asset classes that have lagged behind.

3. Reduced risk through diversification.

4. Active monitoring of your investments.

5. Tax efficiency to lower tax consequences of your investment program.

Like any other financial plan, your investment program will need to be updated routinely as your needs, goals or risk tolerance changes. Wilbanks Securities stands ready to update your plan as needed.