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november 2006

Salem business Journal

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Asset Allocation – More on the Subject Let’s Talk: W. Ray Sagner CFP In February’s column we focused on asset allocation as a part of disciplined investing. Some of the readers of that article have asked for more detail on the subject, so over the next two months we will take a more in depth look into what asset allocation is and why it (as well as diversifying within the asset classes) is important. Once you understand the concepts and terms we will be discussing over the next two columns, you should have sufficient knowledge to begin to ask the right questions concerning your current investment decisions. statistically over a period of time – usually, the longer the time frame the better assumptions you can make. Now, stick with me here, I won’t get too deeply into jargon… we use standard deviation (SD) as one measure of risk, and we can define SD as how much the return varies from the average over a period of time. It is not important that an investor knows the statistics used to measure risk and return, but s/he should understand that risk can be quantified and be confident that the advisor with whom s/ he is working with is knowledgeable and is working from reasonable assumptions. With that said, let’s explore a simple example of how risk and return work together. Assume we have a portfolio that has had an average return of 8% over a 10 year period with a SD of 6.5. That tells us that 68% of the time or over 6.8 years we can expect a return of 1.5% to 14.5% during that period. If we use two SDs that tells us that 95% of the time, 9.5 years out of 10, we can expect a return from -5% to 21%. Now every one would delight in a 21% return, but the point is, can you live with a negative 5% return during one of those years? usually too late. The advisor’s job is to help you understand the variance in returns and choose a portfolio that will maximize your return and reduce the inherent risk as much as possible over your time horizon. And that brings us back to asset allocation. As an investor you need to be aware of the risk (i.e., of the probability of having a down year and of how down that year can be), and aware of whether or not you will be willing to stick with the investment plan given the down year. This is the discipline required to be a successful investor. Investors lose a great deal of potential return by moving to cash when (or usually after) the market heads south, and then get back in once they are confident the market has returned -- First, the reason we invest (or participate in the growth of the global economy) is to earn a return or be rewarded for risking our invested money, to meet our goals. So, the questions an investor must address are: a) what kind or amount of return do I need or expect, and b) how much risk am I willing to take over my time frame to earn that return. In the February issue we defined asset allocation as how the investment dollars are divided between the asset classes, domestic and international stocks and fixed income securities, among large and small companies. Studies have shown that asset allocation decisions account for over 90% of a portfolio’s return. It is not which securities or mutual funds were bought or sold, but how the assets were divided among the various asset classes. Of course, an investor can increase his or her chances of a better return by performing a rigorous screening process on the securities or money managers to be included in the portfolio, and then by maintaining over site to make sure the security or manager has no fundamental changes. Risk and be described return can Perceptions human Resources: Alice Berntson, SPHR Do you believe that you have a good understanding of how your employees see you? Why does that matter? Each is unique and sees life from their perspective. That perspective includes you, your business, communication and actions during their employment with you. What you believe you’re communicating may be something entirely different than what your employees perceive. perspectives and can’t understand their sense of “fairness”. The result is that many don’t see their workplaceasfair.Inadditiontodisappointing employees who expect fairness, a climate of perceived or actual unfair treatment can result in negative attitudes and behaviors: mistrust in management, job dissatisfaction, absenteeism, retaliation, and turnover. All of these negatively impact employee morale, as well as the organization’s bottom line. After a decision has been made concerning the allocation between asset classes, the next step is diversifying among styles, growth and value. The stock and bond markets are composed of numerous styles and sectors (i.e., large cap value, small cap growth, of partiality may lead employees to perceive that you’re being inequitable. Being consistent will also help prevent the appearance of bias. If you use different sets of rules to judge people, employees will perceive your actions as unpredictable and not to be trusted. Managers sometimes do “ignore” rules for certain employees, or apply rules more rigidly to one over another. Doing this virtually guarantees that employees will perceive unfairness. bonds, bonds, government corporate Fairness is all about perceptions. You may wholeheartedly believe that you’re being fair to your employees. Fairness isn’t about you, however. Some otherwise intelligent and knowledgeable managers have difficulty seeing from their employees’ energy, industrials, etc.). By diversifying within each asset class an investor can access the return potential of the financial markets and reduce risk. It usually takes little extra time to ensure that employees feel they’re being treated as fairly as possible. Don’t make assumptions about what the employee sees or believes. Seek information and listen carefully; try to understand the situation from the employee’s perspective. Acknowledge the employee’s perception as their reality, even if you think they’re wrong. Going even deeper, there are sub-styles under the growth and value umbrella. For instance, one can classify companies as deep value, core value, relative value, and on and on. As the development of the portfolio becomes more complex many wealth advisors will choose specialist money managers to facilitate the design of the portfolio. Specialist money managers will vary in approach and the criteria with which they choose the companies they invest in. Employees will be more likely to see their organization as fair if they’ve had some input when planning major changes that affect them. People are more committed to the outcomes when they’ve had a say in how things are done. U.S. Bancorp Grant Announcement Sometimes employees don’t want you to do anything; they just want to be heard. Don’t offer to take any action until you’ve asked what they would like you to do. Trying to lessen the impact of unfavorable news by hiding the truth and not disclosing information actually leads to perceptions of unfairness. Employees don’t have the right to know all the details of your decisions, but they do deserve to receive explanations based on the facts. These are many of the ways that employers impact their employees’ perceptions. “Doing the right thing” and being as fair as possible will help create a positive work environment with loyal employees. That will favorably affect any organization’s bottom line! A.C. Gilbert’s Discovery Village is pleased to announce receiving a $5,000 grant from U.S. Bancorp The grant will assist in the development of curriculum and acquisition of materials for hands-on, inquiry- based classes. At this point you should see that selecting an index fund or trying to diversify a portfolio with individual stocks can be a daunting task, to say the least, and can reduce your participation in many facets of the economy. Alice Berntson is the owner of Spectrum A.C. Gilbert’s Discovery Village provides educational programs to approximately 25,000 children each year through Village classes, camps, workshops, school programs, after school programs, festivals and off-site opportunities. consulting firm, Human Resources providing clients with a full spectrum of human resources services and solutions. She has more than 20 years of results- oriented experience in all areas of human resources and is a certified Senior Professional in Human Resources. Contact Alice at 503-428-8633 or by email at alice@ Make sure your decisions result from accurate information. If you aren’t well informed about a situation or rely on hearsay, employees are likely to view your decisions as arbitrary. Refusing to change a decision after you’ve received new data could also be perceived as unfair. You may be certain that you are objective and neutral, but just a hint Next month we will finish up our conversation about building a well- allocated and well-diversified portfolio. A.C. Gilbert’s Discovery Village is a nonprofit children’s museum located on the north end of Salem’s Riverfront Park. For information, call 503 371 3631 or go to http://www.acgilbert.org Ray Sagner is a Certified Financial Planner® with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at Ray@TheLegacyGroup.com You may view the Company’s web site at WWW.TheLegacyGroup. com spectrum-hr.com. the firm’s website Visit at www.spectrum-hr.com, information. for additional

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