I've spent the last few days working with the investment advisor.
It took quite a bit of work collecting financial statements for all of our investments and holdings (not that we have so many assets, but we do seem to have lots of accounts).
The interactive process began once the advisor had received the signed contract, the information and my payment.
So far, we have had several discussions and I have received several e-mails focussing on building the asset allocation model. One of the key points in reviewing each asset class or the ratio of one asset class to another was my tolerance for potential short term losses (what was the worst loss in a 1/3/5/10/20 year period for a specific asset class). Some assets can have significant short term losses that over a short period of time, however, in situations where they have losses over longer periods of time, the size of the loss usually shrinks.
The key matter is ones tollerance for short term losses. Some combinations of asset classes have had one year losses as high as 44%. The critical point is one's ability to stick to the asset allocation model during times of loss. At some point in the year (or more than one point in the year), you would rebalance your assets to return to your original asset allocation model. By rebalancing you end up getting a massive discount on the asset classes that have under performed - in essence you're buying them at their low. You're also selling your over performing asset classes at their high. This is the way investing should be done - buy low, sell high. Unfortunately, most people lose their nerve when one or more asset classes experience significant loss. They sell low and then seek to buy the asset class back when it's high again - what a great way to lose money!
So the key is the ability to stick to your asset allocation model, even when in the short term one or more asset classes perform miserably.
There are other key psychological concepts that I'll mention in a future post.