2006-08-18 / Columnists

Focus On Financial Affairs

Tools, Strategy And Wise Investors

Across the country, mutual fund companies are now offering - or will soon offer - their version of an investment vehicle known as the Individually Managed Account (IMA). IMAs provide access to the expertise of some of the country's finest private money management firms and the ability to create a customized portfolio, in addition to tax efficiencies and liquidity options that many high-net-worth investors find appealing. If you have taxable assets to invest and a long-term time horizon, IMAs may be a tool worth considering. Mutual fund companies certainly have a strong incentive to add IMAs to their list of offerings - any investment vehicle that tends to attract affluent, long-term investors is a good investment vehicle to sell. You can expect to see fund providers both big and small heavily touting the tax efficiency and portfolio customization benefits of IMAs in the not too distant future.

What's All the Fuss?

What you probably won't be told is that Individually Managed Accounts are not a new concept. Money managers for America's wealthiest families have managed customized accounts since well before the Civil War. IMAs, in their present form, have been available to investors, through investment advisors, since EF Hutton launched them in 1975. The general public's recent "discovery" of the benefits of tax-aware investing has catapulted IMAs onto the radar screen much the way the bull market of the 1980s launched the massive resurgence of interest in stock mutual funds, an investment vehicle that had been around since the 1920s.

While introducing the public to an alternative way to invest seems like a good thing, it doesn't change anything about the nature of the financial markets. In the euphoria over tax savings, let's not lose sight of the fact that markets don't always go up. Every investment vehicle that helps investors participate in the stock market also exposes them to risk. IMAs are a tool and, like all tools, are most effective when used properly.

The Real Lesson Here

IMAs are rapidly becoming a preferred investment vehicle for tax-aware investors. They can provide substantial tax advantages, excellent liquidity and access to some of the best minds in the money management industry. What they don't always provide is an intelligent investment strategy. The best managed small-cap IMA in the world is still probably the wrong choice as the primary investment vehicle for an elderly investor looking for interest income. Likewise, an IMA made up of long-term bonds might not be the best core holding for a recent college grad looking for investment growth.

If you think these examples are extreme, think again. People lose money in the stock market every day. Some needlessly risk and lose their money in a blind hunt for superior investment returns. Others fail to take the level of risk necessary to have any hope of meeting their future needs. Turn on the radio or the television and listen to the astounding volume of shares that are traded on the markets in a single day. In addition to the mistakes already mentioned, countless dollars are lost during these transactions on such easy to predict and easy to control items as fees, trading costs and taxes.

It's Not Just the Investment Vehicle, It's the Strategy!

The formulation of your investment strategy should be based on your personal needs, goals, risk tolerance and time horizon. Your strategy should include realistic expectations for investment returns and the understanding that markets don't always go up. Strategy formulation should come first. Investment vehicles should then be chosen based on how well they fit into your strategy, their cost effectiveness and, when appropriate, their tax efficiency. IMAs may be a good vehicle to help you reach your goals, but wise investors figure out what it is that they are trying to build before they spend money on tools.

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