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Personal Portfolio Management for the Timid
by Amy Renca
http://www.flmanagement.com
Americans are encouraged to save for their own retirement
and most companies offer a 401k plan. However, the
workplace is unpredictable and the chances of staying with
the same company for decades are slim. This means that
the chances of rolling over a 401k from a company-sponsored
plan to a self-directed 401k are high. In a self-directed
401k plan the individual makes the decisions on how the
money is invested. While people tend to invest money in a
mutual fund that has just experienced a high rate of
return, this strategy does not work well in the long run
because money is being invested when the value of the
shares is at a peak. There are sensible and balanced
approaches to take to managing your portfolio that can
lower risks and still give a good rate of return.
The first tip for managing a balanced portfolio is mixing up
your purchase of stocks and bonds. As volatile as this
approach sounds at first, conservative investors will find
this mixture much more manageable. Granted, the stock
market is able to perform with much volatility; however,
even the most conservative can attempt to make the most of
this method. The best way to maintain a stable growth
during these fluctuating periods in the market is to balance
your portfolio with both stocks and bonds. While
historically bonds do well while stocks are faring poorly, a
mixture of these investments can balance out bad years like
the down markets of 1987 and 1994.
True or false: By investing about 15% of your portfolio
money in stocks, your portfolio is much less risky than one
that~s 100% invested in bonds. As confusing as this may
sound at first, this declaration is true. It~s also true
that bonds do create a fixed yield while the bond market is
down. During this period, investors can entirely loose
their money invested in bonds. However, when the investor
includes stocks in that same portfolio, losses are less
risky. Stocks and bonds customarily do not loose money
simultaneously. In other words, most stocks increase in
value while bond values decline. Losses during those
periods are offset by the stock~s increased value and risks
are lessened while the portfolio~s overall value is
maintained or enhanced.
A too conservatively set-up portfolio runs another risk: a
lower rate of return. When an investor opts for a lower
risk, his return is typically stable, yet not as high of a
rate of return on average. As the cost of living creeps up
year after year, more and more dollars are needed to
maintain a standard of living. No real growth in the
portfolio is achieved when the portfolio keeps pace with
only the cost of living. This is known as inflation.
If you are a conservative investor or have become afraid of
the stock market due to the turmoil of the 1990~s, consider
adding some modest amount of risk to your portfolio in terms
of stocks. This will add balance to your investments and
actually reduce your overall risk. If you are afraid to
invest on your own, consult with a financial advisor and
clearly state your position as a conservative investor.
Any ethical advisor will follow your wishes.
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