Make sure the investment portfolio you build will fly. That means fitting a diverse array of specific stocks, bonds, mutual funds and money-market funds into an intelligent mix so they'll each perform differently in different periods.
It doesn't mean hauling around a Dumpster full of overlapping holdings. Quality and purpose are what matter, not sheer mass of investment names.
And don't be a copycat. Craft a portfolio suited to your temperament, wallet and goals. Be sure you can easily track the number of investments so you can adjust them as conditions change. While you shouldn't fixate on your portfolio, don't leave it untended, either.
Take time now to ponder future needs, take an inventory of all your existing holdings and determine if you're headed in the right direction.
"At the starting gate, try to understand what rate of return you need based on future retirement or cash flow projections," said Mark E. Balasa, certified financial planner, certified public accountant and co-president of Balasa Dinverno Foltz & Hoffman, financial advisers in Schaumburg, Ill. "Then try to understand how much tolerance you have for risk, which is more art than science because there is no numerical formula."
Right mix of stocks, bonds
A rule of thumb among many financial planners is that the stocks or stock mutual funds in your asset allocation should equal 100 minus your age. Based on that, a 30-year-old would have 70 percent in stocks.
The most commonly found mix these days is 60 percent stocks and 40 percent bonds, said Balasa. If you have less than 50 percent in stock, you're considered conservative. If you have 70 percent in stock, you're considered aggressive.
"Figure out exactly where your money is and in what accounts, whether IRA, 401(k) or personal account, and what investments are in those accounts," said Harold Evensky, a certified financial planner and chairman of Evensky Brown & Katz financial advisers in Coral Gables, Fla.
Ask yourself where you'll actually spend money. Calculate how much you'll need annually to maintain a certain standard of living in retirement, and whether that tab might include a grandchild's college education or a trip around the world. Factor in inflation, then prioritize your goals because it's unlikely you can accomplish them all.
There are many different investments with solid long-term track records that could meet your needs. Our examples emphasize mutual funds because they're so accessible to average investors.
Evensky's primary holding for the broad stock market is the exchange-traded fund iShares Russell 3000 (IWV). He'd also put money in small-cap Schwab or Vanguard index funds, as well as Julius Baer International Equity (BJBIX).
In bonds, he likes Vanguard Short-Term Tax-Exempt (VWSTX), Thornburg Limited-Term Municipal National (LTMFX) and T. Rowe Price Tax-Free Intermediate Bond (PTIBX).
"The most important difference between portfolios is the risk level, which we control by adding bonds or money-market funds to the mix," explained Sheldon Jacobs, editor of The No-Load Investor newsletter (www.sheldonjacobs.com), Irvington-On-Hudson, N.Y. "In 2000, 2001 and 2002, we had substantial amounts of cash [money markets] in our portfolios, but today we have no cash in them."
Big nest egg can risk more
It's simplistic to talk about risk only in terms of the investor's age, even though it is a factor, Jacobs contends. The amount of money you have is a far greater determinant, he said, because "if you have, say, $10 million, you can take risk no matter how old you are."
Jacobs' aggressive Wealth Builder portfolio for those far from retirement is 90 percent stocks, including Vanguard Total Stock Market Index (VTSMX), Baron Small Cap (BSCFX), Janus MidCap Value (JMCVX), Artisan MidCap Value (ARTQX) and Muhlenkamp (MUHLX). The international portion includes Causeway International Value (CIVVX) and T. Rowe Price Emerging Europe & Mediterranean (TREMX).
The 10 percent of the portfolio in bonds would include Fidelity New Markets Income (FNMIX) and Vanguard Short-Term Corporate (VFSTX).
"We put together a mix of low correlation asset classes so that when something zigs, the rest of the portfolio zags," noted David Bendix, CPA, certified financial planner and president of Bendix Financial Group in Garden City, N.Y. "Blend different styles, such as growth and value, and include domestic and international stocks so that your portfolio is globalized."
Growth investing involves paying more for popular stocks that are rising rapidly even though they may be more volatile. Value investing seeks downtrodden stocks that may be destined for a comeback.
Rebalancing, or adjusting the percentages of your portfolio, is crucial, Bendix noted, and should be considered on a quarterly basis. If the growth portion of your portfolio has really grown, move a greater percentage into value, or vice versa.
When you've found a comfortable split between stocks and bonds, divide up each of those categories. His suggested stock mix includes large-capitalization growth and value funds, small-cap stocks, international stocks and real estate funds.
Bendix recommends large-cap American Funds Growth Fund of America (AGTHX) and SunAmerica Focused Growth & Income (FOGAX), small-cap Oppenheimer Main Street Small Cap (OPMSX), global Oppenheimer Global (OPPAX) and real estate's Wells S&P; Real Estate Investment Trust Index Fund (WSPAX).
In bonds, he likes Pimco High-Yield (PHDAX), Franklin Floating Rate (XFFLX) and Oppenheimer Limited-Term Government (OPGVX).
Andrew Leckey is a Tribune Media Services columnist.