Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Gold, US Stocks and Bonds - 26th MAY 18
Climate Change Canaries and Our Changing Climate - 26th MAY 18
Gold Junior Stocks GDXJ ETF Fundamentals - 26th MAY 18
What to Expect at a Critical Stock Market Point: End of a Wave 2 Rally - 25th May 18
Merlin Passes Top Tips for Buying and Using Premium vs Standard, Theme Parks UK - 25th May 18
Trump “Victories” on Trade are Anything But - 25th May 18
Crude Oil: It’s Here! - 25th May 18
Stock Market Distribution Pattern Revealed - 25th May 18
Stock Market Topping - Everything Looks Rosy at the End of a Trend! - 25th May 18
Trump Puts North Korea Nuclear WAR Back on Track as Plans for Nobel Peace Prize Evaporate - 25th May 18
Insane EU GDPR SCAM Triggers Mass Email Spam Attacks! - 24th May 18
Stock Market Higher Again, but Still No Breakout - 24th May 18
Study: Slowing Global Economic Growth IS NOT Bearish for U.S. Stocks - 24th May 18
What if This Week’s Rally in Gold is Already Over? - 24th May 18
EUR/USD – Reward for Bears - 24th May 18
5 Terrible Trading Mistakes That Rookie Investors Keep Making - 24th May 18
More Clarity for the Short Term for Bitcoin Price - 22nd May 18
Study: A Rising and Strong U.S. Dollar Isn’t Consistently Bearish for the Stock Market - 22nd May 18
Gold, Silver & US Dollar Updates with Review of Latest COTS - 22nd May 18
Upside DOW Stock Market Breakout May Be Just the Beginning - 22nd May 18
5 Reasons Why Forex Trading Is Becoming Such A Big Deal In SA - 22nd May 18
Fibonacci And Elliot Wave Predict Stock Market Breakout Highs - 21st May 18
Stock Market Ideal Cycle Low Near - 21st May 18
5 Effects Of Currency Fluctuations On The Economy - 21st May 18
Financial Conditions are Still too Easy for the Stocks Bull Market to End - 21st May 18
US Stock Market Elliott Wave Predictions for 2018 and Beyond - 20th May 18
Are You Still Fearful of Cryptos? - 20th May 18
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18

Market Oracle FREE Newsletter

Trading Lessons

Time to Fine Tune Your Investment Portfolio

Portfolio / Learning to Invest Nov 09, 2010 - 08:04 AM GMT

By: Nilus_Mattive

Portfolio

Best Financial Markets Analysis ArticleIn my last couple of columns, I told you about two different portfolios that I’ve been running, both of which contain dividend stocks and have been performing very strongly.

That prompted some of you to write in asking what differentiates these two portfolios. It’s a great question and it raises the bigger issue of how you can tweak your own portfolio to better suit your goals and individual tolerance for risk.


The most important difference between the portfolios I’ve been telling you about lately, and something you should carefully consider for yourself, is asset allocation the broad types and proportions of investments being held in a particular portfolio.

Take my Dividend Superstars portfolio. It contains only dividend stocks (and cash on the sidelines), and I never plan on adding any other type of investments to it.

Meanwhile, my Dad’s Income Portfolio — though currently invested only in dividend stocks and cash — WILL contain other types of income investments as I continue to build it out. For example, I will consider preferred shares, bonds, and other income-oriented mutual funds.

Why Is Asset Allocation So Important?

Because countless studies have demonstrated that it is the #1 factor in a portfolio’s overall long-term performance and behavior. In fact, it is far more important than even the specific investments bought and sold!

What this means is that your first step toward building a better portfolio is not figuring out what particular stock or bond to buy, but rather how much of your nest egg should be invested in each of these particular asset classes (plus others such as real estate and commodities).

How can you decide this?

Well, your desired asset allocation changes over time based on your age and needs. So consider where you’re at in your life right now and go from there.

For example, a younger investor might choose to hold 80 percent in stocks because there’s plenty of time to ride out the greater volatility that comes with this particular asset class. Meanwhile, a retired investor might choose to put far more money in bonds and cash for greater liquidity.

This is precisely why many financial advisers cite the following rule of thumb: “Take 100 and subtract your age. The result is how much you should put in stocks.”

Do I think it’s that simple? Hardly. But the basic idea is sound.

And to circle back, this explains the difference in my two portfolios. Dividend Superstars is meant to be a self-contained list of solid income stocks that can be used for a wide range of investors and purposes — largely depending on what other investments they might own. Dad’s Income Portfolio is designed specifically for my 63-year-old father and other conservative, income-starved investors.

Of Course, Asset Allocation Is Just The First Step in Building a Better Portfolio …

Don’t get the wrong idea: While asset allocation might be the most important aspect of customizing your own portfolio, I think you absolutely must pay attention to the specific investments you use within those asset classes as well!

For starters, even if you’ve decided to put 80 percent in stocks and 20 percent in bonds, you may favor different categories within those asset classes depending on current conditions.

Examples?

Well, you might want to hold corporate bonds rather than Treasuries right now. Or put more money into utility stocks rather than tech shares.

At the company-specific level, you could favor a bond from General Electric over one from General Motors.

And even if you’re largely a set-it-and-forget-it investor using index mutual funds or ETFs, you could choose the S&P 500 fund from Vanguard over one from T. Rowe Price based on criteria like expense ratios.

One Other Thing to Watch Out For: Investment Overlap

While the ideal scenario is building a portfolio from the ground up — like I’m doing right now — the reality is that most investors have amassed a “collection” of investments over many years or even decades. They may have accounts at multiple brokerages and with different employee retirement plans, too.

The end result is that it’s a lot harder to figure out asset allocations and even the exact proportions of specific investments they own!

Consider someone who holds individual stocks in a brokerage account and then mutual funds in a retirement plan. Unless they’re paying careful attention, one of their stock mutual funds could easily be holding a large amount of a stock they already own individually. The end result is potentially too much exposure to one single investment. Likewise, the same risk exists even with different mutual funds or ETFs.

So, with all that said, here are …

Four Simple Steps to Perform a Portfolio Tune-Up!

First, look for ways to consolidate your accounts wherever possible. That will make it easier to keep track of things going forward.

Second, do a quick inventory of all the assets you currently own and figure out what your current asset allocation is. Decide whether this is where you want to be right now.

Third, if you’ve got a mix of funds and individual holdings, do your best to determine whether you’re too exposed to one particular investment. You can generally get a good feel for what investments are inside ETFs by visiting their company websites. Mutual funds aren’t quite as transparent, but they do post their holdings on a quarterly basis.

Fourth, also look for long-standing losing positions that might be cut now and used for tax advantages, as well as investments that may no longer suit your current risk tolerance and goals.

With the end of the year rapidly approaching, this is the ideal time to take a step back and re-evaluate your overall portfolio. And in just an afternoon’s time, and with a little bit of planning, I guarantee you can find ways to improve your overall portfolio’s performance for 2011 and beyond!

Best wishes,

Nilus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules