by Lita Epstein, MostChoice.com You may think that picking top performing stocks or mutual funds is the answer for building a best long term portfolio, but that is not the case. Many academic studies have shown that the actual equities chosen account for 5% to 10% of the portfolio's success, while 90% to 95% can be attributed to the allocation of your portfolio among stocks, bonds, and money market instruments, whether through direct investment or mutual funds. There are four key things to consider to help you determine the right asset allocation: - Your investment goal: The most common are for retirement, for education or for the down payment on your first home.
- Your investment horizon: Once you have determined your goal(s), the time horizon is easy to calculate. If for retirement, and you have 20 to 30 years to go, you can consider a more aggressive portfolio because you can ride out the highs and lows of a volatile stock market. But, if your primary goal is to save for a home, you don't want to take the risk of facing a dip in the stock market just as you are ready to withdraw the funds for the home purchase. In that case, you are better off with money market instruments. Saving for educational expenses are usually somewhere in between, depending on the amount of time you have before needing the money.
- Your risk tolerance: Here are some good questions to ask yourself:
- Do market fluctuations keep you awake at night?
- Are you unfamiliar with investing?
- Do you consider yourself more a saver than an investor?
- Are you fearful of losing 25% of your assets in a few days or weeks?
If you answered "yes" to these questions, you are likely to be a "conservative" investor.
- Are you comfortable with the ups and downs of the securities markets?
- Are you knowledgeable about investing and the securities markets?
- Are you investing for a long-term goal?
- Can you withstand considerable short-term losses?
If you answered "yes" to these questions, you are likely to be an "aggressive" investor. Or, if you fall somewhere in between the two, you could call yourself a "moderate" investor.
- Your financial resources: The amount you have to invest will also be a factor in the risk you might want to take.
If you want help sorting our your asset allocation and building your portfolio, contact us and we'll help you find a local advisor who can review your financial planning needs and help you make the best choices. |
