Reinvigorate Your Portfolio!

Although diversifying your financial portfolio has never been more important, tomorrow’s uncertain economic outlook can make choosing between different vehicles and different strategies confusing for the novice. Nonetheless, the individual investor can create a strong, forward-looking portfolio to achieve their long-term goals in five simple steps.

Step 1: Articulate Goals

The successful investor knows precisely what he is saving for (retirement, college, or vacation home), and when he intends to begin withdrawing his investment (10, 20 or 30 years). Armed with clear goals, the individual investor can create and maintain an investment strategy that will meet them.

Step 2: Determine Risk Tolerance

Almost every investment carries some risk of loss. The investor must identify exactly how much they are willing to lose and what amount of return they expect for suffering the risk. Consider the risk-benefit balance of the following:

Safe investments have no risk of principal loss. Often FDIC insured, these savings accounts, money market accounts and certificates of deposit (CD) have low rates of return. Such options subject the investor to the risk of “losing out” on an even greater return because a slightly riskier investment vehicle was chosen. Consider that the return on CD’s (under 1% for 2012) is typically lower than the cost of living adjustment (3.6% for 2011).

Low-risk investments, like government bonds, notes, and bills, are often guaranteed, but their low risk produces low returns (about 3% on a 30-year treasury bond). Municipal bonds, issued by cities are generally safe, although recent municipal bankruptcies have made this market riskier than previously thought.

Moderate to high-risk investing is commonly managed through a diversified portfolio comprised of a mixture of stocks, mutual funds, bonds and commodities. The higher risk can produce higher returns such as with the S&P 500, which has doubled in value since 2009.

Step 3: Develop a Strategy

The investment strategy must reflect the investor’s risk tolerance. Passive managers are typically cautious, choose assets with a history of growth and hold them for years; their long-term approach protects the investment from short-term volatility. On the other hand, active managers research new opportunities to seek out “good deals.” When given the chance, they prefer risk taking over your average market returns. Either strategy, if diligently pursued, can be effective; the key is to develop a plan and stick to it.

Step 4: Choose Investments

Financial wizardry has created an astounding number and variety of investment vehicles. Novice investors are cautioned to avoid complicated financial instruments like derivatives. When comparing the efficacy of different instruments, it is useful to know each vehicle’s expected return on investment (ROI), calculated in the following way:

ROI = ((Gain on Investment – Cost of Investment) / Cost of Investment) * 100%

Typical forward-looking portfolio assets include the following:

Annuities provide the investor with serial or lump payments at a set time in the present or future. The investor buys the annuity from an insurance company, either as a lump sum or a series of payments. Common varieties include fixed annuities, variable annuities and indexed annuities.

Bonds are like IOU’s issued by a company (or government) to an investor who “loans” money when they purchase bonds. Typically bought and sold by underwriters in the over-the-counter (OTC) market, bonds pay interest during their lives and the principal is repaid at the end of the term.

Commodities are agreements to sell a certain amount of a good (such as coffee, corn, gold, or oil) on a future date at a set price. Careful research is required to defray the risk of predicting the future; and because of that risk, the commodity market has many younger investors who have more time to recoup any losses. Nonetheless, even cautious and older investors will use a diversified commodities portfolio to hedge against inflation.

Stocks are issued by a company and represent an ownership interest in it. Typically sold as shares in public markets like the NYSE or NASDAQ, most investors purchase stocks through a broker who charges a commission. Stocks generate returns either by issuing dividends (payments of profits to shareholders) or growing in value by the time the stocks are sold. Income earned through the sale of stock is taxed at the much lower capital gains rate.

Mutual funds offer investors a portfolio of assets that are typically comprised of instruments from a number of different companies. Typically an investment adviser who is registered with the SEC will manage the fund for a fee. As with any fund, investors purchase shares and the investment’s value rises and falls with the overall value of the fund’s portfolio. Common funds include stock funds, bond funds, money market funds and index funds.

U.S. Treasury Securities include a variety of instruments such as savings bonds, Treasury Inflation-Protected Securities (TIPS), treasury bonds and notes (with maturity dates from two to 30 years) and treasury bills (with maturity at one year or less).

Step 5: Avoid Pitfalls

Perhaps the most common mistake investors make is relying too heavily on experts – be they money managers, financial gurus or the financial media. Diligence and research will protect the savvy investor from Ponzi schemes, senior-targeted fraud, unregulated crowdfunding, unsavory promissory notes and unscrupulous and unlicensed brokers.

By taking a practical, step-by-step approach, the individual investor can build a strong, forward-looking portfolio. With a clear plan, thorough research and diligent management, successful investors will meet their long-term financial goals.


Further Reading

Market Data Center

Information on Saving & Investing (

Investing in Bonds

North American Securities Administrators Association

Beginner’s Guide to Investing

U.S. Commodity Futures Trading Commission