Portfolio Management
Asset Allocation
Asset Allocation ? Is your Portfolio Really Diversified
Asset allocation may be the investment equivalent of flossing your teeth, most people know they should do it, but somehow they just don't get around to it. What Exactly Is Asset Allocation? In many ways asset allocation is synonymous with diversification. But diversification is a relative term. While most investors will tell you they are diversified, they probably don't have a real asset allocation plan. Consider the co-worker who likes to brag about his/her portfolio of 20 pharmaceutical...more
Asset Allocation- Easing The Burden of Diversifying
Knowing how to build a diversified portfolio can seem overwhelming. Two words that seem to go hand in hand when investing are risk and return. Asset allocation can be an investor's primary tool for managing overall portfolio market risk by apportioning investment funds among categories of assets such as cash equivalents, stocks, and fixed income investments. What Is Asset Allocation? Asset allocation is the subjective and ongoing process of selecting the asset classes that could meet...more
Regardless of how smoothly they operate, all individuals, organizations, industries, and economies routinely experience setbacks, ranging from minor inconveniences to major catastrophes. Even the most closely managed portfolio is not immune to setbacks. In fact, they are so likely that the best defense may be to expect some losses but to employ a method to help reduce any damage. Go Negative Different groups of investments may be subject to different types of risk. Negative...more
When asked how their assets are diversified, most people respond by indicating how much of their portfolio is divided between stocks, bonds, and cash. But looking at your overall financial diversification means more than simply looking at your investment portfolio - you need to examine all your assets. Some items to consider include: Your most significant asset is probably your ability to earn an income The predictability of that income will have a significant impact on your financial...more
We all know we should rebalance our portfolios periodically to ensure they stay in line with our targeted asset allocation. Why, then, is it so difficult for us to do this? The primary reason is that rebalancing goes against our basic instincts. With rebalancing, you are generally selling those investments performing well to purchase those that are underperforming, which just doesn't seem to make sense. It might help to remember that by rebalancing, you are following a fundamental investment...more
Periodically, you should thoroughly review your portfolio to ensure it is still helping you work toward your investment goals. Follow these steps during that review: Review your current portfolio mix. List the current value of all your investments. Determine what percentage of your portfolio is held in stocks, bonds, cash, and other investments, but don't stop there. Take a closer look at where the stock portion of your portfolio is invested. Break down your stock investments by market...more
With an asset allocation strategy, you can't just allocate assets in your portfolio once and then forget about your portfolio. Over time, your actual asset allocation will stray from your desired allocation because different investments in your portfolio will experience different rates of return. At least annually, review your portfolio to see if changes are needed to bring your allocation back in line. Some factors to consider include: Reevaluate your desired asset allocation percentages,...more
Using Diversification to Control Volatility
The past few years have taught investors the meaning of volatility in investing. While investors weren't that concerned about volatility before 2000, when it worked to their advantage, the negative volatility of the past few years has been much tougher to deal with. It has pointed out the necessity to look beyond average rates of return to the volatility of those returns. Even if your projections for the average rate of return are correct, the pattern of those returns will affect your ending...more
Determining the Optimal Rebalancing Frequency
Within the investment consulting community, it has long been preached that periodically rebalancing a multi-asset class portfolio is a requirement for an effective investment policy. However, little research is available to help in determining what is the optimal rebalancing frequency. From an efficiency and simplicity standpoint, rebalancing at a set time period, such as annually, may be easiest. However, if you consider the taxes and transaction costs that result from rebalancing, we question...more
Asset Allocation: Could It Really Be That Simple?
Now we'll discuss how rebalancing also keeps your portfolio in line with your target allocation (which should be based upon your risk tolerance and goals). Consider the case of two investors, Bruce and Mike, who owned the same stock and bond funds in tax-deferred accounts back in early 1997. Both are the same age, have the same goals, share the same risk tolerance and have their desired 60%-40% split between stocks and bonds, respectively. Emboldened by the stock market's heady gains,...more
Rebalancing: Don't Just Stand There, Sell Something
Rebalancing - using new cash or shifting money to bring your investment portfolio's target allocations back in line annually - is one of the simplest and soundest investment strategies around. This, of course, supposes that you're following some sort of asset allocation policy to begin with. In this letter we will try to help you develop an understanding of the benefits in having an asset allocation policy and how this simple advice can improve your chances for success when making...more
Diversification: Too Much of a Good Thing
Investing, by its nature, is the goal of taking something and creating an environment in which it will grow. If done properly it will grow on a continual basis and the amount of growth received will reflect the amount of risk assumed in reaching for the growth. Some people selling investment advice speak and write frequently on "diversification" or "diversity within the portfolio" as if it were the goal of investing. Diversification is a tool to be used by the investor but is not the goal of...more
Realistic Expectations: Staying in the Market
The only two things that were ever considered to be absolutes in life were death and taxes. I would suggest that we add two other items to that list; the predictions for the coming year in January of every year followed by the December list of reasons why the predictions for the past year were wrong. Many of the so-called forecasters are feeding on the fear of the investing public and the uncertainty they feel with their statements in the red. Many investors will be tempted to trash their...more
Fine-Tuning Your Entire Portfolio
When it come to investing, are you a micromanager? Or a hands-off type? Micromanagers obsess over their portfolios. They switch in and out of investments with every tic and tremor on Wall Street or in the economy. Hands-off types are the opposite. While they might polish and buff their cars every weekend, they pay little attention to whether their portfolios are on track to achieve their investment goals. Whatever kind of investor you are, you stand a better chance of reaching your investment...more
Asset Allocation: A Key to Portfolio Success
For many investors, investing typically begins with one stock or mutual fund. Over time, other selections are added because many people understand it may not be prudent to invest everything in a single security, even if it has a "blue chip" reputation. However, just 'spreading money around in a haphazard way may create only an illusion of diversification. If you have assembled a "hodgepodge" portfolio, you may not know the extent to which your investments are (or are not) consistent with your...more
You're almost certainly familiar with diversification, but it is also one of the most misunderstood investment concepts. Diversification is one of the most commonly discussed topics among all types of investors from those just starting out to the largest money managers on Wall Street. The reason: 'Diversification is, without question, one of the keys to your success as an investor,' says Steve Fortin, a director of planning with Lincoln Financial Advisors in Cincinnati, Ohio. 'But you must...more
Asset Allocation Helps to Manage Risk and Return
When asked by a waitress whether he would like his pizza cut into six or eight slices, Yogi Berra is reputed to have said, "Six. I'm not hungry enough to eat eight slices of pizza." How you slice the pie is the key to successful investing, too. Many investors spend the lion's share of their time and energy on deciding which stock or bond to hold in their portfolios. Asset allocation, however, can be much more important. Asset allocation is the process of spreading your investment dollars into...more
Today let's discuss why asset allocation, a basic but often misunderstood aspect of investing, is important. When you invest, you must have accumulated assets (like cash, but sometimes also stocks, options, real estate, cash-value insurance, precious objects, etc). Your goal should be to redeploy (allocate) these assets in ways to both maintain value and grow value ultimately providing the saver with financial security, peace of mind, and freedom. Assets are any resources with value - value...more
Location, Location, Location: A Primer on Asset Location
In the construction of your portfolio, asset allocation, investment selection, cost containment, and tax efficiency may be the most important decisions that you face. Each of these decisions affects the performance of your portfolio to varying degrees, some more significantly than others as described in Todd's article. Structuring a tax-efficient portfolio through asset location has the potential to maximize the after-tax return of the portfolio. The term asset location refers to the...more
Are Your Assets Really Diversified?
You've heard the old investment adage, "Don't put all your eggs in one basket." It's good advice. A diversified portfolio should be at the core of any well-planned investment strategy. While a worthy goal at any age, it's especially desirable as your net worth grows over the years. The basic purpose of diversification is to reduce your risk of loss. It's primarily a defensive type of investment policy. Depending on your investment goals and tolerance for risk, your strategy may emphasize one...more
Why Is Asset Allocation Important?
The theory behind asset allocation is to spread your investments across different asset classes to help protect your portfolio from downturns in any one asset. Since different investments are affected differently by economic events and market factors, owning different types of investments helps reduce the chances that your portfolio will be adversely affected by a particular risk type. Does asset allocation really accomplish this goal? To see how asset allocation can help reduce your...more
Just as a healthy "balanced" diet promotes good health for your body, a balanced portfolio promotes healthy investment returns. In matter of fact, balancing your portfolio is infinitely more important than WHICH stocks you choose! The meats always get star billing in a meal and the vegetables are considered "side" items. The salads and breads are simply 'add-ons.' People don't go to a steak house for the vegetables. They spend their time looking through the menu searching for which meat they...more
Bumpy Ride Ahead: Techniques for Tempering Market Gyrations
Global stock markets have had to digest a full plate of unsettling events this summer - everything from the North Korean missile tests and the renewed conflict in the Middle East to a new terrorist plot to bomb aircraft. It certainly would not be unusual for events such as these to increase uncertainty among investors who may be already concerned about the direction of economic growth, corporate profits, inflation and interest rates. So what can investors do? Worrying about what may happen...more
Your Investment Roadmap: The Investment Policy Statement
When traveling to unfamiliar territory most people will take along with them roadmaps (the more technical among us might even use a global positioning system). When navigating through the investment world maze, having an Investment Policy Statement (IPS) can help you and your advisor stay on the right path. The IPS is a document to help memorialize your investment risks, objectives, goals, constraints and other relevant factors with your advisor. A well-crafted IPS should cover the...more
The Importance of Diversification
Diversification is a tool used by financial professionals to help investors create a portfolio focused on achieving their goals and dreams, without exposing them to undue risk. Diversification assists in creating balance in an overall portfolio and may alleviate the potentially drastic highs and lows of a portfolio focused on only a few investments. This balance helps to keep individuals focused on investing for the long term. A diversified portfolio is created through the process...more
Should You Invest in the Stock Market or in Real Estate?
By Paula Pant Investing is part of any healthy financial plan. But if you're new to the game, it can be overwhelming and intimidating. Where do you start? What do you even invest in? Should you try the stock market? Are you ready to invest in real estate? There are pros and cons to both options. The important thing isn't deciding which route is better, but deciding which is better for you. Here are some of the important things to keep in mind when considering whether to invest in the...more