May 19th, 2010 | Kiplinger
Portfolios That Fit Your Needs
If you had stitched together a sound, well-conceived investment plan before the financial crisis hit, you stood a much better chance of staying invested through the bear market than if you had neglected to look ahead. Then again, as former heavyweight champion Mike Tyson once put it, “Everyone has a plan till they get punched in the mouth.” Boy, did we get socked! A Bloomberg survey found that a year after the stock market bottomed, two-thirds of U.S. investors said that their portfolios hadn’t recovered at all. This implies that many people were out of stocks at the market’s bottom, likely because they had abandoned their plans at just the wrong time. Or maybe they bailed because they didn’t have a road map to begin with. (Or perhaps, after taking that knockout punch, they stopped paying attention.)
This package will give you everything you need to construct a diversified portfolio tailored to your needs. We’ve assembled portfolios designed for three common situations: a young person focusing on growth, a couple with retirement on the horizon and a retiree looking to generate income without fear of outliving his money. We’ve also put together portfolios for four special situations: investors looking for ultra simplicity, those with a modest kitty, those willing to go beyond the traditional assets and people who want nothing to do with stocks.
Although these portfolios are customized to meet specific goals, they are not one-size-fits-all. Feel free to make alterations that suit your needs. Or use our tool to find the portfolio that’s right for you.
Start with the basics
The first question to ask yourself is, What is my financial goal? Sounds simple enough, but you’d be surprised how many investors never answer it. Whether you want to save for retirement, college, a home or some combination of things, articulate your purpose. Write it down. “If you don’t have your goals clearly laid out, you have no way of measuring the success of your portfolio,” says Kevin Mahn, chief investment officer of Hennion & Walsh, an adviser in Parsippany, N.J. The more specific you can be in terms of your time frame, the dollar figure you’re shooting for and the growth you’ll need to get there, the better.
After establishing your goals, determine how much risk you can handle. Risk is a fuzzy concept. For most professionals, risk is synonymous with volatility — all of those hills and valleys along your portfolio’s long-term upward trajectory. The more extreme those ups and downs, the greater the chance that your portfolio won’t measure up when it comes time to tap your funds. But the chances of falling short diminish with a long time horizon. From this flows a simple rule: The more time you have, the more risk you can afford to take.
But an equally useful way to think of risk is the likelihood that an event will cause you to abandon your plan. “Volatility creates risk because it can drive people to do the wrong thing at the wrong time,” says Brent Burns, president of Asset Dedication, an investment firm in Mill Valley, Cal.
One of the few good things to come out of the financial crisis is that it gave investors a reference point for establishing their appetite for risk. If you lost sleep as the value of your investments dwindled during the bear market, your portfolio was almost certainly too risky. If you didn’t break a sweat, your portfolio was either just right or maybe it was even too conservative. We show how each of our model portfolios performed during the 2007-09 bear market to help you gauge whether you would’ve been able to hold on.
Chances are that all of these portfolios will lose money in future downturns. Assessing your goals, time horizon and risk tolerance should put you on the path toward figuring the right mix of stocks and bonds. After you nail down the basic mix, you just need to tweak the allocations we’ve provided and make the portfolio your own. For example, if you’re investing in a taxable account, substitute Fidelity Intermediate Municipal Income (symbol FLTMX) for some or all of the taxable bond funds. Spooked by emerging markets? Skip them — but only if you can resist jumping in after you’ve seen, say, Albanian stocks rocket 80% in a year (volatility can make you do the wrong thing when markets go up, too). “Don’t obsess over the precise details of the percentages you choose,” says Gregg Fisher, president of Gerstein Fisher, an adviser in New York City. “It’s the discipline to stick with your plan that’s critical to its long-term success.”
To stay on track, you’ll need to rebalance at least once a year. If you find you’re getting hung up on the performance of the individual funds in the portfolio, switch to an appropriate exchange-traded fund for a given asset class or to a similar low-cost index fund. The most important thing about these portfolios is the exposure they provide to specific asset classes; you’ll capture the desired results just fine with index funds. And remember those goals you laid out? Take stock of your portfolio’s progress once a year to see whether you’re on course or need to change your allocations, your expectations or both. But resist making such big-picture decisions after you’ve just been socked in the jaw.
By: Elizabeth Ody
As Published On: Kiplinger