***Not making money to maintain his retirement lifestyle.

2008/08/09

YAP MING HUI: Hedging against inflation


IT was an anxious Jimmy that came to see me about a year after he retired. He had sold his factory to a US company.

At our first meeting, I asked him how his retirement life was. He said: "Everything is fantastic. I get to travel a lot and play golf."

However, there was a problem.

"I need to break my fixed deposit every now and then to maintain my lifestyle."

Jimmy has about RM10 million but most of his investments in property, unit trusts and shares were not making money to maintain his retirement lifestyle.

He has about RM4 million in fixed deposit. But the interest income from fixed deposit barely covers the impact of inflation.

If he were to spend the interest income, he will risk having the principal depleted over the years due to inflation.

What is the problem?

Jimmy's problem is a typical case of "asset rich, income poor" -- people who are good at creating wealth from their business or profession but weak at generating income from the created wealth. They are rich in assets which are not generating good investment income.

Jimmy's total wealth is RM10 million. His RM4 million generates four per cent of interest.

However, four per cent of interest is not enough to cover the four per cent of inflation provision. As a result, there is no net income for Jimmy from his fixed deposit asset.

His RM3 million of properties generates a RM50,000 income per annum. This can be considered a net income for him because inflation will be hedged by the capital appreciation of at least four per cent per annum.

His RM1 million of shares give him a total return of nine per cent. After the provision of four per cent inflation, his actual income is RM50,000.

His RM2 million unit trust investment didn't make him any money at all.

Therefore, the total actual income after inflation is RM100,000. Due to the fact that Jimmy needs RM400,000 to maintain his lifestyle, he is short of RM300,000 of annual income.

Solution

- Review the performance of each investment asset classes

Jimmy needs to review the performance of all his investments. He will need to get rid of poorly performing investments. He will need to look at each unit trust fund and property to decide if he should sell or keep them.

- Move fixed deposit into higher return investment

Jimmy's fixed deposit will be eroded by inflation if he continues to leave that much of his wealth under fixed deposit.

After calculating and providing for his short-term cash flow needs, the balance of his fixed deposit should be in other investments that are able to generate higher return to hedge against inflation.

- Diversify retirement income

Just because one investment asset gives you good income and a hedge against inflation, it doesn't mean that you must put all or the majority of your wealth into it.

Some people have been successful in property investing. They managed to generate good capital appreciation and rental income. However, rental income is not necessarily sustainable in the long run and is normally subject to a lot of changes.

Therefore, the best practice is still to diversify your retirement income so that it is not badly affected by any one source.

One should consider also share dividends and capital gains, unit trust gains, bond investment gains and retirement income products.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2315138/Article/index_html

Investments: Spread the risk to maximise returns

Investments: Spread the risk to maximise returns
Getting the balance right could make the difference between a winning and a losing portfolio.

By Paul Farrow
Last Updated: 4:52PM GMT 13 Mar 2009

You will often have heard investment professionals talk about the need to build a balanced portfolio spread across a variety of asset classes.

It is, therefore, perhaps surprising that research reveals that many private investors know next to nothing about asset allocation when it comes to building their investment portfolio.

Research has shown that nearly four out of 10 investors admit that they have little idea how their portfolio is split between equities, bonds and cash.

Even fewer investors are aware of the split in their portfolio by geography, sector or size of stock. Half of those polled confessed that they did not know how their portfolio was structured by country, while 49pc admitted to a similar ignorance about sector exposure, and 48pc were not sure how the portfolio was split between large, mid and small-cap stocks.

Put simply, asset allocation is the balance between the major asset types of property, cash, fixed interest and equities in an investment portfolio.

Getting the balance right is vital if you want to achieve your financial objectives. Fail to do so and it is easy for you either to buy the wrong kind of investment or to create a portfolio of investments that is unlikely to generate the desired results.

The stock market turmoil between 2000 and 2003 showed just how important it is to have a balanced portfolio. People whose portfolios were heavily exposed to equities suffered disproportionately large losses as share prices plummeted.

On the other hand, those with balanced portfolios that had decent exposure to fixed-interest investments such as corporate bonds, property and cash would have fared a lot better. The three asset classes produced positive returns as share values fell, which would have helped offset the stock market losses and eased the pain.

In recent years it has been harder to call – most assets have fallen in value. Overexposure to assets such as emerging markets and commercial property would have hurt you more than exposure to safer investments such as cash and gold.

In real life, the eventual mix of assets in your portfolio will depend on your own personal circumstances, such as your age, earnings, attitude to risk and financial objectives. People with more substantial portfolios, for example, are sometimes advised to introduce more sophisticated investments such as hedge funds and structured products into the mix.

Building a portfolio is also a question of managing risk versus return.

Risk is not just about potential capital losses – you also have to consider the risk of inflation and a potential reduction in income if circumstances go against you. For example, people in their thirties and forties may be prepared to have a greater exposure to equities because they can afford to take a longer-term view and will be looking to grow their portfolio.

People who are nearer to retirement are more likely to want to preserve the capital they have got and adopt a more cautious strategy, with a bigger exposure to corporate bonds. The sensible investor takes into account the amount of risk they are able to tolerate, both psychologically and in terms of their individual needs.

It is therefore vital to understand the different levels of risk inherent in various types of investment. Overly concentrating on a single asset class will increase the risk to a portfolio unnecessarily.

Investors have traditionally adopted a pyramid strategy for building a portfolio, starting with cash, then fixed interest, with equities at the peak. The consensus is that you start with a solid foundation of cash before dabbling in equities or bonds – some say a cash nest egg should represent three, or even six, months' salary.

It is difficult to generalise as individual circumstances will be different, but broadly speaking many experts agree that people seeking medium to low-risk capital growth should aim to have a portfolio that is 60pc invested in equities, 25pc in bonds and 15pc in cash. Those seeking a high, regular income, on the other hand, would do better with just 20pc in shares, 20pc in cash and the remaining 60pc in bonds.

As mentioned earlier, the balance of assets will depend on factors such as age, attitude to risk, financial objectives and the length of time over which you intend to invest.

For example, equities should be viewed as long-term investments – that is to say, held for at least five years. If you cannot afford to wait for that long, you should concentrate on lower-risk, fixed-rate investments such as bonds. If you are looking at less than three years, you should probably limit yourself to cash-based investments.

In the past, as people grew older their investment portfolios became risk averse. They reduced their exposure to equities and generally avoided investments that put their capital at risk. But times are changing and this may not be the right strategy to adopt.

In real life, it is not just the asset mix that investors need to consider when building a portfolio. There are also tax implications, be it capital gains, inheritance tax or income tax liabilities.

For example, it is prudent to make sure you are not handing over more money to the taxman than you need. Individual savings accounts (Isas) allow you to invest up to £7,200 each financial year and gains are free from capital gains tax.

The tax credit on dividend income has recently been scrapped, which means basic-rate taxpayers get no income tax benefit with Isas, but higher-rate taxpayers still do. This is because they will still get a net dividend payment worth 25pc more than they would if their investments were outside an Isa and they had to pay tax.

Obvious practicalities dictate that our Fantasy Fund Manager game will be played over the short period of less than a year, rather than a decent real life investment horizon of five years. Many investors are buying corporate bond funds and equity income funds – whether they will be the winners come next year, who knows.

The shrewd professionals are usually ahead of the game – they take profits before the price has peaked and often buy before values have bottomed.

http://www.telegraph.co.uk/finance/personalfinance/investing/4984569/Investments-Spread-the-risk-to-maximise-returns.html

Allocations not reflecting investor sentiment

Allocations not reflecting investor sentiment
By Rita Raagas De Ramos 30 January 2009

Fund managers surveyed by Merrill Lynch are more optimistic about the economy, but fear of the unknown is driving them to stick to cash and bonds.


Investor sentiment has improved from the lows of 2008, but virtually none of that change is being reflected in actual asset allocations, according to Merrill Lynch’s survey of fund managers for January.


Among the 205 fund managers polled by Merrill Lynch from January 9 to January 15, only around 24% expect the global economy to weaken further over the next 12 months. That’s a sharp drop from 65% in October. In line with the better growth outlook, corporate profit expectations also improved.


Despite the improved sentiment, fund managers are now more overweight in cash, less overweight in bonds, and have generally scaled back regional equity exposure. The fund managers’ average cash balance remains high at 5.3%, albeit marginally lower than December’s 5.5% level. Cash positions reflect risk appetite, with many fund managers normally capping their cash at 5% of their portfolios when they are bullish.


“Investors are talking a more positive story especially with regards to the US, but the fear factor remains,” says Gary Baker, head of Europe, Middle East and Africa equity strategy at Banc of America Securities-Merrill Lynch. “They have the firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocation remains resolutely defensive.”


Within a global equities portfolio, the US has slipped out of favour. Only 7% of the fund managers polled earlier this month were overweight in US equities compared with 25% in December.


“There has been a notable dip in the US equity market’s popularity and emerging market equities have been the new beneficiary of rotation away from the US,” says Michael Hartnett, chief emerging markets equity strategist at Banc of America Securities- Merrill Lynch.


US equity exposure has been cut in favour of global emerging markets, particularly China, and Japan. Europe is still seen as the least attractive region, reflecting a more hesitant government policy response to the financial crisis.


“China remains the big global growth wildcard in 2009,” says Hartnett. “Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very sceptical about Chinese and Asian growth.”


China announced a Rmb4 trillion ($585 billion) stimulus package in November, aimed at combating the most serious economic threat to the mainland since the Asian financial crisis in 1997. Before the stimulus package was announced, China was riddled with worries over the impact of the global financial crisis on both domestic consumption and exports.


The stimulus package, with a life span that extends until 2010, covers key areas including affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. It also includes reforming the value-added-tax system to encourage investment in new technologies.


With foreign reserves and a budget surplus amounting to around $2 trillion, investors are confident that China has the capacity to further stimulate the economy if needed.


Meanwhile, sector-wise, fund managers are most overweight in pharmaceuticals, telecommunications and staples while most underweight in banks, industrials and materials.


The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). The survey measures net responses of the 205 fund managers, whose assets under management totalled $597 billion, by taking the balance between the bullish and bearish views for each survey question.


© Haymarket Media Limited. All rights reserved.

http://www.asianinvestor.net/article.aspx?CIaNID=95130

Madoff Topples Zsa Zsa School of Investing

Madoff Topples Zsa Zsa School of Investing
By Selena Maranjian
February 5, 2009 Comments (1)


A few years ago, I spotlighted Zsa Zsa Gabor as a surprising source of investing insights. Now I'm having second thoughts.

Gabor, who's now almost 92, is in the news again. Why? Well, there's a summary of the situation on a website in her native Hungary, and although it reads like Greek to me, one word in particular stands out ... Madoff. Yes, Zsa Zsa's one of the many customers apparently duped by Bernie Madoff.

Avoiding scams
The glamorous Ms. Gabor has my sympathy, as do all of Madoff's victims. They were swindled, plain and simple. Still, some of them might have suffered less if they'd followed some basic investing rules. For example:

Diversify!
I'm not suggesting you should own hundreds of stocks. Heck, even eight might be enough, as long as they're distributed among different industries and maybe even a few different countries. It appears that many Madoff victims left the lion's share of their wealth in his hands. That's always risky, no matter how much you trust someone.

Tend to your asset allocation
If you have decades to retirement, you might want to be 100% in stocks, as they tend to grow fastest over the long haul. If you have only a few years, you might want to keep some money in bonds. Considering that Gabor is in her 90s, she might do well to keep a chunk of her money in conservative income-producing dividend payers. Here are some contenders -- companies with dividend yields above 3%:

Company
Recent dividend yield

Bristol-Myers Squibb (NYSE: BMY)
5.5%

ArcelorMittal (NYSE: MT)
5.1%

Consolidated Edison (NYSE: ED)
5.7%

Kraft Foods (NYSE: KFT)
4.4%

Titanium Metals (NYSE: TIE)
3.9%

Sysco (NYSE: SYY)
4.0%

Spectra Energy (NYSE: SE)
6.8%


Source: Motley Fool CAPS.


A free, no-obligation trial of our Motley Fool Income Investor service will give you dozens of researched recommendations, many yielding 8% or more.

Be skeptical
Finally, Gabor and others should have been wary of Madoff's relatively consistent returns. Know that the stock market has always gone up over the long haul -- but as we were reminded sharply in 2008, it can swing wildly from year to year.

Don't wait until you're 92 to brush up on your investing basics. They're your best defense against swindles, scams, and other Wall Street dangers.

http://www.fool.com/investing/dividends-income/2009/02/05/how-madoff-swindled-one-of-my-favorite-investors.aspx

Having A Plan: The Basis Of Success

Having A Plan: The Basis Of Success
by Chad Langager (Contact Author Biography)

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." Warren E. Buffett (Preface to "The Intelligent Investor" by Benjamin Graham)

Any veteran market player will tell you, it's vital to have a plan of attack. Formulating the plan is not particularly difficult, but sticking to it, especially when all other indicators seem to be against you, can be. This article will show why a plan is crucial, including what can happen without one, what to consider when formulating one as well as the investment vehicle options that best suit you and your needs.

The Benefits


As the "Sage of Omaha" says, if you can grit your teeth and stay the course regardless of popular opinion, prevailing trends or analysts' forecasts, and focus on the long-term goals and objectives of your investment plan, you will create the best circumstances for realizing solid growth for your investments.

Maintain Focus

By their very nature, financial markets are volatile. Throughout the last century, they have seen many ups and downs, caused by inflation, interest rates, new technologies, recessions and business cycles. In the late 1990s, a great bull market pushed the Dow Jones Industrial Average (DJIA) up 300% from the start of the decade. This was a period of low interest rates and inflation and increased usage of computers - all of these fueled economic growth. The period between 2000 and 2002, on the other hand, saw the DJIA drop 38%. It began with the bursting of the internet bubble, which saw a massive sell-off in tech stocks and kept indexes depressed until mid-2001, during which there was a flurry of corporate accounting scandals as well as the September 11th attacks, all contributing to weak market sentiment.


Amid such a fragile and shaky environment, it's crucial for you to keep your emotions in check and stick to your investment plan. By doing so, you maintain a long-term focus and thus assume a more objective view of current price fluctuations. If an investor had let their emotions be their guide near the end of 2002 and sold off all their positions, they'd have missed a 44% rise in the Dow from late-2002 to mid-2005.


Sidestepping the Three Deadly Sins


The three deadly sins in investing play off three major emotions: fear, hope and greed.


Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.


The second emotion is hope, which, if it is your only motivator, can spur you to buy stock based on its price appreciation in the past. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain.

The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then when prices began to tank, many investors didn't budge and held out in the hopes that their stock would rally. Instead, their once large gains turned into significant losses.

An investment plan that includes both buying and selling criteria helps to manage these three deadly sins of investing. (For further reading, see When Fear And Greed Take Over, The Madness of Crowds and How Investors Often Cause The Market's Problems.)

The Key Components

Determine Your Objectives

The first step in formulating a plan is to figure out what your investment objective is.

Without a goal in mind, it is hard to create an investment strategy that will get you somewhere. Investment objectives often fall into three main categories: safety, income and growth. Safety objectives focus on maintaining the current value of a portfolio. This type of strategy would best fit an investor who cannot tolerate any loss of principal and should avoid the risks inherent in stocks and some of the less secure fixed-income investments.


If the goal is to provide a steady income stream, then your objective would fall into the income category. This is often for investors who are living in retirement and relying on a stream of income. These investors have less need for capital appreciation and tend to be adverse to stock market risks.


Growth objectives focus on increasing the portfolio's value over a long-term time horizon. This type of investment strategy is for relatively younger investors who are focused on capital appreciation. It's important to take into account your age, your investment time frame and how far you are from your investment goal. Objectives should be realistic, taking into account your tolerance for risk.


Risk Tolerance

Most people want to grow their portfolio to increase wealth. But there remains one major consideration - risk. How much, or how little, of it can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatile stocks then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits. However, it is important to remember that volatile investments don't always make investors money. The risk component of a plan is very important and requires you to be completely honest with yourself about how much potential loss you are willing to take. (For further reading, see Determining Risk And The Risk Pyramid and our tutorial on Risk and Diversification.)


Asset Allocation

Once you know your objectives and risk tolerance, you can start to determine the allocation of the assets in your portfolio. Asset allocation is the dividing up of different types of assets in a portfolio to match the investor's goals and risk tolerance. An example of an asset allocation for a growth-oriented investor could be 20% in bonds 70% in stocks and 10% in cash equivalents.


It is important that your asset allocation is an extension of your objectives and risk tolerance. Safety objectives should comprise the safest fixed-income assets available like money market securities, government bonds and high-quality corporate securities with the highest debt ratings. Income portfolios should focus on safe fixed-income securities, including bonds with lower ratings, which provide higher yields, preferred shares and high-quality dividend-paying stocks. Growth portfolios should have a large focus on common stock, mutual funds or exchange-traded funds (ETFs). It is important to continually review your objectives and risk tolerance and to adjust your portfolio accordingly.


The importance of asset allocation in formulating a plan is that it provides you with guidelines for diversifying your portfolio, allowing you to work towards your objectives with a level of risk that is comfortable for you. (For further reading, see The Importance of Diversification and The Dangers of Over-Diversification, as well as Five Things To Know About Asset Allocation and Asset Allocation Strategies.)


The Choices

Once you formulate a strategy, you need to decide on what types of investments to buy as well as what proportion of each to include in your portfolio. For example if you are growth oriented, you might pick stocks, mutual funds or ETFs that have the potential to outperform the market. If your goal is wealth protection or income generation, you might buy government bonds or invest in bond funds that are professionally managed.


If you want to choose your own stocks it is vital to institute trading rules for both entering and exiting positions. These rules will depend on your plan objectives and investment strategy. One stock trading rule - regardless of your approach - is to use stop-loss orders as protection from downward price movements. While the exact price at which you set your order is your own choice, the general rule of thumb is 10% below the purchase price for long-term investments and 3-5% for shorter-term plays. Here's a reason to use stops to cut your losses: if your investment plummets 50%, it needs to increase 100% to break even again. (For further reading, see Ten Steps To A Winning Trading Plan.)


You may also consider professionally managed products like mutual funds, which give you access to the expertise of professional money managers. If your aim is to increase the value of a portfolio through mutual funds, look for growth funds that focus on capital appreciation. If you're income-orientated, you'll want to choose funds with dividend-paying stocks or bond funds that provide regular income. Again, it is important to ensure that the allocation and risk structure of the fund is aligned with your desired asset mix and risk tolerance.


Other investment choices are index funds and ETFs. The growing popularity of these two passively managed products is largely due to their low fees and tax efficiencies; both have significantly lower management expenses than actively managed funds. These low-cost, well-diversified investments are baskets of stocks that represent an index, a sector or country, and are an excellent way to implement your asset allocation plan.


Summary

An investment plan is one of the most vital parts for reaching your goals - it acts as a guide and offers a degree of protection. Whether you want to be a player in the market or build a nest egg, it's crucial to build a plan and adhere to it. By sticking to those defined rules, you'll be more likely to avoid emotional decisions that can derail your portfolio, and keep a calm, cool and objective view even in the most trying of times.

However, if all of the above seems like too tall an order, you might want to engage the services of an investment advisor, who will help you create and stick to a plan that will meet your investment objectives and risk tolerance.


by Chad Langager, (Contact Author Biography)

Chad Langager is the Senior Financial Editor for Investopedia.com. Chad graduated from the University of Alberta Business School with a degree in finance.


http://www.investopedia.com/articles/pf/05/061005.asp?partner=WBW

Under 50? Do This, or You'll Regret It!

Under 50? Do This, or You'll Regret It!
By John Rosevear December 8, 2008 Comments (1)

I know, I know -- the stock market is crazy and unpredictable right now.

I know that sitting in cash or doing nothing until things settle down seems like a sensible course of action.

But I also know this: 10 or 15 years from now, the market will be up. Way up from here, in all likelihood.

If you're under 50, and you're trying to figure out what to do with the wreckage of your retirement portfolio, there's only one good answer: Buy great stocks.

Here's why.

When the game is rigged, bet with the house No, the stock market isn't "rigged" in the sense of being manipulated. It is, however, inherent in the market's nature to go up over the long term, scary bear markets notwithstanding.

Check out these 15-year returns, which assume purchase on Dec. 8, 1993 and include reinvested dividends for those stocks that have them:

Stock-----15-Year Gain

McDonald's (NYSE: MCD)
430%

Apple (Nasdaq: AAPL)
1,110%

Southern Company (NYSE: SO)
804%

Nokia (NYSE: NOK)
541%*

Qualcomm (Nasdaq: QCOM)
1,945%

Johnson & Johnson (NYSE: JNJ)
573%

Target (NYSE: TGT)
612%

Source: Yahoo! Finance.
Figures as of market close on Dec. 5, 2008. *Nokia return since Apr. 25, 1995.

Those returns are despite the dot-com bubble bursting and despite the recent market crisis. As Richard Ferri, an investment manager and author of several books on asset allocation and indexed investing, argues in this month's issue of Rule Your Retirement, there are strong reasons to believe that the market is naturally prone to going up over time -- and that average annual returns near 10% over the next 15 years are extremely likely.

His methodology and reasoning are a little too elaborate to lay out here -- check out the complete article for specifics -- but his recommendations for those under 50 are crystal-clear:

• Your portfolio should be 100% in stocks.
  
• Continue to add to your retirement accounts, and use that money to buy stocks.
  
• Be aggressive -- as aggressive as you can stand.
  
• Ignore performance. Don't look at your statements.
  

That last one might seem weird -- how will you know how you're doing if you don't look at your statements? -- but Ferri has a point. He argues that they're "completely irrelevant" -- following short-term price movements just doesn't give you any useful information. In fact, it's more likely to give you something to worry about, needlessly.

I'd add this caveat: This only works if you have very long-term investments! Not all portfolios are built to run 15 years or longer with no more maintenance than the occasional trade or rebalance -- in fact, most aren't.

How do you do that?

Construct a long-haul portfolio

Ferri is a proponent of indexing -- of using index funds and ETFs in your retirement portfolio. That’s one way to build a long-term investment strategy. Another way, one likely to yield far greater returns if done right, is to buy great stocks -- the blue-chip dividend monsters and future giants that will keep delivering rewards year after year. (Can you guess which method I favor?)

Of course, "buy stocks" isn't a complete to-do list. To maximize your gains over the long haul, you need a solid asset-allocation plan -- one that gives you exposure to all the key corners of the stock market. Your 401(k) provider can probably help you come up with a decent one -- though as a rule, those computer-generated templates tend to be more conservative than is appropriate for most young investors.

A far better set of asset allocation roadmaps for retirement investors -- one of the best I've seen, and one that works well whether you're using mutual funds in a 401(k) or stocks in an IRA, or a combination of the two -- are the ones maintained by the team at Rule Your Retirement. They're available to members by clicking on "Model Portfolios" under the Resources tab after you log in.

What do the unfolding financial crisis and ongoing market volatility mean for your money? The Fool's here with answers. Fool contributor John Rosevear owns share of Apple. Southern Company and Johnson & Johnson are Motley Fool Income Investor selections. Nokia is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor recommendation.

http://www.fool.com/personal-finance/retirement/2008/12/08/under-50-do-this-or-youll-regret-it.aspx

**A Seven-Step Process for investing in New Assets

Advice for investment accumulators
By Christopher M. Flanagan, J.D.

Published January 1998

React to this article in the Discussion Forum.


Frequently, people make investment decisions based not so much on what they know or what their experiences have been but, rather, on how they acquire assets. In other words, how investors build their portfolios often is driven by how they acquire their investable cash. For example, one might be a partner in a medical or law firm and receive a partnership distribution. Or, perhaps he or she is a corporate executive who receives a yearly bonus. In either case, assets are received in stages or "chunks," and the individual must now determine an investment route for these new assets. The result of this piecemeal approach now is a collection or accumulation of investments. It is a difficult process if you have a goal of being consistent with an overall plan.


A Flawed Investment Process

After receiving that Christmas bonus, or perhaps liquidating part of a business, the accumulator’s investment process typically takes the following path. First, current market trends are considered, e.g., "Blue chip stocks seem to be doing well," or "There are global opportunities, but market volatility is a concern." Ideas are then checked with a knowledgeable person whom the investor respects (stockbroker or relative). Next, the investor reviews his or her current portfolio and considers whether to add to existing investments, e.g., "I might want to add money to my common stock fund." Finally, the money is invested. The process appears logical to the accumulator, but it is flawed in that it typically takes into account only "this year’s" money and not all of the investor’s assets. The result is a collection of investments, rather than a portfolio with a comprehensive strategy.


A Seven-Step Process


While everyone’s situation is unique and financial needs can be met and addressed in a multitude of ways, the process for identifying what those needs are revolves around the same fundamental issues. At the risk of oversimplification, applying the following seven-step process would enable the accumulator to make smarter investment decisions for the long-term and not just for the moment.


Establish an investment goal. Establishing investment goals amounts basically to writing down, in language someone else would understand, one’s personal investment goals. It can be in very general terms, such as "I want to have enough money for a comfortable retirement," or "I want to make sure I can put three children through college," or perhaps, "I never want to run out of money." That’s pretty plain language, but it certainly does the job of identifying an individual’s financial ambitions and concerns.


Determine the ability to tolerate investment risk. Understanding how much risk someone can tolerate is a very personal thing, but one rule of thumb can help an individual know when they’ve exceeded that comfortable level. Again, it is a basic guideline, but one should "never own any investment that will cause you to lose even five minutes’ sleep at night." Investors frequently ignore this guideline in an "up" market.


Calculate the annual return objective: what kind of performance do you need to get from your investments. The next step is to calculate the average annual return the investor needs or wants, and there are a couple of ways to do this. Begin by looking back at the personal investment goals. As an example, let’s use the goal of a college education for three children. If an individual needs $100,000 a year in today’s dollars—and knowing how much he or she has today and how much will be put aside going forward—you can go through the mathematical calculations of figuring out exactly what annual return on the money is needed to reach the goal. The individual can then get a sense for whether his or her expectations are realistic and whether he or she is setting enough aside to invest for future use. Another method is to take a look at the historical performance data, not over a one-year period, but over a ten-, thirty-, and fifty-year period. Studying long-term performance results will help to keep in line the investor’s expectations for future returns.


Select asset allocation among types of investment vehicles. The next step is determining the asset allocation that best meets investment objectives. Arguably, this is the most critical step and one where individuals could benefit from some professional advice. Asset allocation, the buzz words in financial services today, is how assets are apportioned among various asset classes (stocks, bonds, etc.). The goal is to achieve the highest return at a risk level the investor is comfortable with. Achieving the highest return for any given level of risk is an efficient portfolio mix. Generally speaking, we know that between 65 percent and 85 percent of a portfolio’s performance will be dictated by the structure of the portfolio—the mix of asset classes—rather than the specific individual investments that are held within it. Consequently, it is more important to figure out what portion of a portfolio should be in stocks, etc., rather than which stocks to select. Here is where someone might call on expert assistance. Chart first how much risk exists in the current portfolio (it is often more than expected). Next, determine if it is possible to increase potential returns without increasing your risk and identify the ideal mix of investment types, (stocks, bonds, etc.) necessary to accomplish this.


Choose specific investments. Based on the investment types identified, it is now time to choose the specific investments that are most appropriate. This is where most of the investment "clutter" happens: comparing which stocks did better than others, which funds outperformed benchmarks, etc. And it is here that one needs to have a well-diversified portfolio. Once again, though, while investment selection undeniably impacts the overall performance of a portfolio, it is more important that those investment selections are diversified within the investment types that best support the investor’s long-term investment strategy.


Monitor portfolio performance quarterly. While it isn’t necessary to get mired in every single week’s or month’s worth of statements, it is important to review results on a quarterly basis. Take a hard look at the percentage returns on the entire portfolio during the past quarter. How do those results compare to the annual percentage return objective and to the long-term goal? Were performance expectations met, and were they realistic? Does the investment strategy need to be adjusted?


Revisit steps 1-5 annually. Once a year, walk through the above steps for making smarter decisions. Revisit (perhaps revise) investment goals, as they can and should change over time. With the current appetite for risk in mind, calculate the annual percentage return objectives. Accurately select the asset allocation that will help to meet those goals, and the result will be a successfully structured portfolio.


Ironically, "investment accumulators" usually don’t appreciate how successful they truly are. Because they didn’t inherit their money or win a lottery, but rather just worked for it a little at a time over the years, they don’t think of themselves as "wealthy" or even financially successful. Consequently, they may not be giving their investment portfolio the respect it deserves.


Christopher M. Flanagan, J.D., is a regional manager for Mellon Private Asset Management, a service mark of Mellon Bank Corporation and its subsidiaries.



http://www.physiciansnews.com/finance/198.html

Preparing Your Portfolio Is the Most Important Action You Can Take

The One Factor Stock Investors Can Control

Preparing Your Portfolio Is the Most Important Action You Can Take
By Ken Little, About.com

When the stock market is running very hot or very cold, it is on everyone’s mind and few conversations last very long before turning to the latest numbers.

Whether it is the dot.com boom of the 1990s or the credit crisis of 2007, when the market is erratic and volatile, people are engaged.

The factors that lead to a boom-bust cycle in the market are important. Investment professionals and regulators spend a great deal of time trying to understand what happens in the market during these periods.

Individual investors have little influence on the market. While it is important to understand what happens and why, that is not the most important consideration for individual investors.

Stock Investors Important Influence

The most important influence on how your portfolio performs is how well you have prepared it. Preparation is the only factor you can influence.

Preparation means adopting a reasonable allocation between stocks, bonds and cash. It also means diversifying you holdings by industry sector, company size and growth and value stocks.

Most investors should consider a bond allocation equal to their age. For example, a 45 year-old investor should have 55 percent in stocks and 45 percent in bonds.

You can’t know with any assurance which turns the market will take - even industry professionals don’t know.

However, if you have five or more years before you need to convert holdings to cash, the odds are good that your portfolio will do as well as possible if you maintain a reasonable allocation.
There are no guarantees in investing. You assume that over the long-term your holdings will grow, however an assumption, even one based on historical truths, is not a guarantee.

Establishing an Allocation

Establishing an allocation and maintaining it is a challenging exercise. Here’s why:

Assume your allocation was 60 percent stocks and 40 percent bonds. If stocks are shooting up, the temptation is to put more money into the hot side of your allocation - ride the gains up.
What this often means is investors pay inflated prices. When the boom collapses as they all do, investors are either stuck with stock worth much less than they paid or they bail out with a loss.

The rational way to approach a rapidly expanding market is to watch your allocation and when it becomes out of balance, sell off stocks and add to bonds. This may let you take profits, but you may miss out on some future gains.

In a rapidly dropping market, investors should consider buying stocks to maintain balance. You may be able to buy stocks at depressed prices, which increases the odds of significant gains when the market returns.

Many investors would find their losses were lower and their gains higher if they would maintain a reasonable allocation regardless of what the market does.

If you can take a long-term approach, you could look at your holdings once a year (or maybe once a quarter in very volatile markets) and make adjustments.

The remainder of the time avoid the temptation to buy during a boom or sell during a bust.

http://stocks.about.com/od/investingstrategies/a/102608portfolio.htm