By Timothy R. Barron
While many advisors focus on what to buy based upon their forecasts, fears and hopes, there is not sufficient attention placed upon how to buy. In the real world of investing there are three pillars to success: beta, your exposure to various asset classes; alpha, your positioning for excess return through security selection; and implementation, the process you employ to select and combine sources of beta and alpha to achieve your goals. Implementation is the unsung hero of investing. Here are some fairly straightforward resolutions that can improve the governance of your portfolio in 2012 and beyond.

1. Have a short- and long-term investment plan.

Although everyone agrees that you should have a short- and long-term investment plan, it bears repeating every January. The plan should include definitions of success for various portions of your investments and savings, but perhaps more importantly, it should define failure. Short-term goals are subject to volatility, but they provide important yardsticks to measure progress. A good plan is written, measurable (with benchmarks), specific to your objectives, realistic, reflective of success and failure, and implementable while being flexible.

2. Consider putting more into savings.

Investment returns are almost universally expected to be lower for the foreseeable future. One need only look to the yields on fixed-interest assets to conclude that it will be a challenge to attain the level of returns that were "normal" during the 90's and much of the pre-crisis period. Lower returns mean more contributions or lower account balances, which means you will have to save more or lower your anticipated dollars for spending or retirement or other situations. You should plan on having enough savings to provide 80% to 85% of current annual income in retirement. If returns are better than expected, consider it a very pleasant surprise.

3. Assess your service providers.

The world of those who provide advice and assistance in developing investment programs and asset management is constantly changing, with 2011 bringing significant attention to independence, conflicts and fees. We have been through a tumultuous few years, with perhaps more to come, and it is a good time to ask yourself if you feel as though you got what you paid for from the various professionals you rely upon for investment services. In volatile times, the best relationship people will increase their touches, others will try to be "out of sight, out of mind." Dig out your old plan (which you did for #1 above) and ask yourself, "Although capital market returns may have been disappointing, do I feel as though the folks on my side gave me their best?" During the good times we were dazzled by double-digit asset growth; during leaner times you need to be sure your team is working hard for you. Ask yourself whether your advisors are sufficiently connected to the macro themes or global developments impacting capital markets, and whether they are able to offer actionable advice to properly position or tilt your portfolio accordingly.

4. Never lose sight of downside of risk.

There is an old saying that goes, "If you want to earn return, you have to take some risk." There is an even older saying, from that days before Madison Avenue got into the investment business, that goes, "Why do you think they call it risk?" People always seem to have to relearn the latter after having been rewarded by the former. Your resolution is to assess both sides of risk-understanding that the appearance of outsized asset returns always means the possibility of outsized losses. Always. The phrase "This fund/investment goes up more than (substitute any benchmark or goal here) every year without fail," should be followed by the words, "You mean like Madoff's?"

5. Evaluate costs.

With 10% returns on equity markets (remember those days), an active management fee of 1% still leaves you a juicy 9%. So, even if you get zero in excess return, you preserved 90% of the market return. In a 6% return environment (which lately sounds pretty good) that 1% leaves you with 5%, so you only preserve 83% of the market return. The risk of active management, which feels good in a low-return environment because you need that promise of more dollars, has a greater impact on a relative-to-benchmark basis in such times. For flat fees the math is even worse. A $100,000 fee on $5,000,000 eats into 20% of your earnings in that 10% market, but chews up one-third in the 6% upmarket. Add up what you are paying. Does what you are receiving make sense? A good rule of thumb is that the added value for good advice and management should be at least three times the amount of the fee or cost. Otherwise the risk of net losing is probably too much. That makes good asset allocation and structure generally worth a lot more than good stock selection. Yet you probably spend more time and money on the latter than the former.

6. Do not listen to those who claim diversification is dead.