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The Five Steps to Making Investment Decisions

Mel Brandon

Which came first? Throughout the ages, the question of the chicken or the egg has led to many discussions and even more questions. This article is not about chickens or eggs, but it is about the order that we should think about financial matters.

On first introduction, we are often asked, “What do you think of a specific investment, insurance product, or style of investing?” There is only one correct answer to this type of question: “It depends.” The intent is not to be vague or avoid the question; “it depends” is the correct and definitive answer to such a question.

We firmly believe there should be a process for making investment decisions that involves these five steps in the following order:

  1. Purpose
  2. Time
  3. Risk
  4. Tool
  5. Monitor and Adjust


Money is a tool that can be used to perform a task or actions aimed at producing a desired result. Have you ever tried to drive a nail with a screwdriver or pliers? It can be done, but the most efficient tool to drive the nail would be a hammer.

Wouldn’t it make sense to define the result I desire before I select the tools I will use to achieve my purpose? If we think of money, investments and savings as tools, it becomes clear that we must first define our purpose in order to select the proper tool for the job.

Purpose can be specific to a desired item, such as purchasing a new car or second home. It could be to achieve certain goals, like funding your children and grandchildren’s education, or your purpose might be to fund your retirement. The list is endless and as varied as people, but the main point is that you must define your purpose before choosing your tools. You can have several different purposes at the same time, and each purpose may require a different set of tools.


So, we have defined a purpose. What comes next? Knowing how long we have to achieve our purpose is the next important step in our decision process. Our goals should be structured as short-, mid- and long-term. Knowing when we want to achieve our goal/purpose and its duration will greatly affect our choice of investment tools.

For example, short-term goals might require that we take less risk and keep the funding in a more accessible or liquid form. Some products or investments require that the funds be committed for a set or indeterminate time frame. There may be surrender charges, penalties, fees or tax consequences for cashing out early. These types of tools might not be the best choices for short-term goals.

Each financial product or investment program has rules, restrictions, time commitments, and costs associated with it. Establishing a time frame for each purpose/goal allows us to make better choices about the tools we use to best achieve the purpose.


The other face of reward is risk. Risk might be the most misunderstood function of selecting investment tools. Not all risks are created equal, nor does everyone view risk the same way. We each must work to understand the risk/reward relationship and determine our own willingness to accept risk.

risk (n.)

  • The possibility of suffering harm or loss; danger.
    • The variability of returns from an investment
    • The chance of nonpayment of a debt

We all have a general concept of risk when we position our money to earn more money. Many people get off course, however, thinking of risk as a percentage instead of actual dollars. Try using real dollar figures when analyzing an investment’s risk of loss compared to the potential gain. A 10% risk factor sounds very different from saying my $100,000 could lose $10,000 and be worth only $90,000. While watching your investment lose value, at what point would you “feel the pain?” This pain threshold is the true test of how much loss we can stand in our pursuit of gain. Once you have an answer to that question, it will be easier to decide whether an investment or product has the right risk/reward relationship for you.

Gauging risk in relation to the wrong time period, as it relates to a chosen purpose, is another error made by many. When the funds will be needed in the short term, you should not be looking at an investment vehicle in light of its long-term risk potential. In opposition to this, longer-term purposes should be based on long-term risk/reward potential with less emphasis on short-term fluctuations. The risk level should match the timeline of the investment’s purpose.

The risk we take may be of our own making. Financial decision-making based on emotional responses has led many investors into unfavorable results. The old saying “buy low and sell high” gets turned upside down frequently when we allow greed or fear to make our decisions for us. It is not uncommon for investors to enter the market at or near its high point, having been seduced by upward trends, only to see a significant downward trend follow their entry. This downward trend in the markets causes that “feel the pain” mentioned earlier to kick in, which leads to exiting the market at its lower levels. We just bought high and sold low; this is far more common than you might imagine. While a professional analytical approach to decision-making cannot guarantee success, it can help manage the risk of making decisions based on emotions.

Another type of risk is being too cautious. An excess of caution can lead to under-performance, causing failure to achieve the desired purpose. In today’s world, cash may be safe, but it will not provide the growth needed to sustain buying power that may be eroded by inflation.

It is also necessary to be aware of the risk of fraud, as well as of the abilities of the companies where we place our trust to fulfill their obligations and promises. We must do our due diligence to assure ourselves that the people and companies we do business with are of the highest caliber. This is not something to do only when deciding to invest or place funds; you should make a habit of doing follow-up inquiries on a regular basis.


Once we have defined our purpose, determined our time frame, and assessed our risk, it is time to choose our tools. Every financial product in existence has its own benefits, costs and rules of use. There can be great variations in these features, even within different versions of the same types of products or investments.

In comparing benefits, costs and rules, you should always do so in relation to your needs and desires. You can own the best hammer in the world, but it is of little value if what you really need is a plain, ordinary screwdriver. It is vital to understand which tool fits your needs the best. If what you need is a low-risk, income-producing fund, you most likely should not be swayed by the wonderful, flashy high-return hedge fund someone has or is selling.

Let’s look at some examples:

Being price-conscious, an investor asks the cost of an investment. Broker A quotes a fee of 1% and Broker B quotes 1.5%. Which do you choose? The answer is that you do not have enough information in order to make a decision. Are there any other costs inherent in the investment? Is this the cost for the advisor only, or the total cost? What is the expected performance of the investment, as well as its past performance? What were the economic conditions in effect during this past performance as compared to today’s economic climate? Is the cost subject to change? How much management and contact will be provided?

Gauge the following comments we have heard from prospective clients:

  • “My current firm only charges me 0.75%.” Reality: They were in money market funds, cash and CDs with an average return of less than 0.5% and received no advice or management at all.
  • “Being a conservative person, I’m in low-cost index funds. I’ve heard that fees are bad for performance.” Reality: This person really was conservative and had the need for income from their investments. The fee was low because the index fund they were invested in was unmanaged and had a full-market-risk structure. Whatever the market did was also the result for his funds. While in the long term this might be a good tool, in the short term, it could be quite inappropriate for this person. The only mechanism for receiving income was selling shares. A downtrend in the index would result in losses, but the need for income continues. Pulling income from a volatile fund, especially in a downward trend, can be like rolling a snowball down the hill. The fee might have been low, but the tool was poorly chosen.
  • “I don’t pay any fees at all, and I can’t lose principal.” Reality: This person needed to have regular access to these funds and, at the same time, needed a 5% to 6% growth rate. What he had was a fixed annuity with a 7-year surrender charge period. The fixed return/interest rate was 2.5%. He had limited access to the money without a penalty, it was underperforming for its purpose, and an exit would be expensive.

There are many other examples I could detail. The thing is, all of the above tools can be great for the right purposes. It is their misuse that puts them in a bad light. Fees should be considered in light of the services, management and results you will receive. The fees you pay should be evaluated regularly against the question, “Are you getting what you are paying for?”

One very popular concept today is having an income rider attached to an annuity. There are several different types of annuities, but we won’t get into that in this article. The presentation for these income riders is some variation on the theme of income, to be generated at a future date, that can’t be outlived. For many, this is a way of creating a pension-style income and can be a wonderful idea. Having a regular, dependable, predictable income as a base for your retirement has a lot to be said for it, especially if it will last your lifetime, no matter how long you live.

In light of this section, which is about tools, let’s discuss these income products a bit more in depth.

These income structures are not all created equal and a lot of marketing techniques are employed in the sale of these products. It can be difficult for a person to ascertain which product and rider is best for them.

Ex: Which is better? Over the next 10 years, your income account will increase by a percentage of…

  • 10%
  • 8%
  • 6%

This is a trick question. Is the percentage of increase simple interest or compounded? A $10,000 purchase getting 8% simple interest would increase over 10 years to $18,000, while the compounded rate would generate an account of $21,589.

Most of these accounts are an accounting feature only, which means that the roll-up account is used only to determine the amount of income the company will pay when you trigger the income feature. This means that you do not have access to the income account value for yourself, and if you pass away, your heirs will not get this roll-up account. They will instead receive the actual value of the product, which may be far less than the roll-up income account. There are some exceptions to this, but they are rare. Many people think that the guaranteed roll-up percentage increases their assets by the stated percentage, but in most cases, this is not true. You should explore this question carefully when examining these products.

The true question that should be asked is, “For every dollar I put in, how many dollars will I get out as income?” Besides the questions of “What is the roll-up percentage?”, “Is it simple or compounded?”, and “Will this account go to my heirs?”, you must pay close attention to what percentage will be applied to the roll-up account when you start your income. This number can vary widely between these types of products.

Ex: Assuming compounding growth percentage:

  • $100,000 earning 10% for 10 years with income percentage of 4.5% will pay: $11,671
  • $100,000 earning 8% for 10 years with income percentage for 6% will pay: $12,953

The bigger roll-up percentage is not always the best deal. Will the income be static or increase with inflation? Can you choose for you and your spouse to receive the income for both your lifetimes? Do you need to choose this when you purchase the product, or can you wait to decide until you are ready for the income? Does the agent selling the product have limited choices or knowledge of other products? These are only some of the questions that you need to ask and understand their answers in order to make the best choice.

We have not discussed picking the right advisor, custodian or management style to any great degree, but I hope that you have come to the conclusion that knowing only part of the story is not sufficient to making good decisions. You may find it difficult to find a firm that has expertise across a broad spectrum of disciplines, such as investments, managed money, business, life insurance, long-term care, annuities (fixed, fixed indexed, variable), income planning, legacy, charitable gifting, and tax issues, and will work to design a holistic plan for you and your family. It would be worth the effort to find such a firm.

Monitor and Adjust

Colin Powell, along with many others throughout history, said something to the effect of, “No plan of battle survives meeting the enemy on the field.” In other words, things change. Goals, purposes and situations can change over time. Economic conditions, tax structures, investment climates, and rules will change. You need to work at monitoring your plan and make adjustments as needed. This requires you and your advisor or money manager to be proactive in monitoring the plan and meet regularly to discuss progress or changes. Regular reporting to you via emails, texts of status, or phone calls should be a part of the service you receive.

With technology available today, your portfolio could be monitored on a daily basis with prompt updates of the account’s status. Certain reporting systems can pull online reports of your investments and savings accounts into one easy-to-use interface and send you weekly updates via email, or you can log in to view them at any time.

It is my opinion that annual reviews are not sufficient, especially during the first year of working with an advisor. I suggest quarterly reviews during the first year, and then choose your comfort level for full reviews thereafter; either way, there should be regular contact with your advisors. Things can change quickly sometimes, and regular exchanges will help keep you in the loop.

This process can be of great value to you in choosing the right investment, style of investing, or product. Let’s recap.

Purpose, Time, Risk, Tool, Monitor and Adjust

  1. First, define the purpose of the investment or product.
  2. Determine the time frame to achieve the purpose and for how long the purpose will exist.
  3. Assess the risk from every angle.
  4. Choose your tools based on these factors.
  5. Follow up on monitoring the plan, and make adjustments as needed.

I hope this article will be of assistance in your process of selecting the right investment strategies and products.

About the Author:

Mel Brandon is a senior associate and financial professional with Aul Financial Group, LLC. Since 1991, Mel has specialized in the areas of retirement preservation and income planning strategies for those in and nearing retirement. Mel works with clients to structure customized financial strategies to address issues compromising their lifestyle. To contact Mel, call (636) 230-8824 or email him at

Visit to learn more and to see how you can get a free book titled “Stress-Free Retirement”.


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