As we said yesterday, building the perfect portfolio depends on the individual investor. The portfolio will usually reflect the goals of the investor, for example, a person starting to save for retirement will be more concerned with growth of the portfolio, while a retiree is more interested in protecting his capital. Thus, as a person nears retirement their priorities change reflecting their different goals and attitudes towards investment, and this should in turn be reflected in the securities an individual invests in. Building the perfect portfolio should be an ongoing process as Katy Marquardt explains in the following article.
When you hear the word hobby, you probably think of typical pastimes, such as photography, gardening and tennis. Not Jeff Blades. The St Louis resident would rather spend his free time training for the ultimate challenge: Iron Distance triathlons. These races include a 2.4-mile swim, a 112-mile bicycle race and a 26.2-mile marathon — back to back to back. Blades, who has completed 70 triathlons (and is signed up for several more this year), says pacing is the secret. “Simply put, short-term thinkers do not survive the grueling 140.6 miles,” he says.
Blades, who works in software sales, applies the same discipline to managing his mutual fund portfolio. You might even call investing his other hobby. Each year, he maxes out his 401(k) contribution as early as possible (the limit is $15,500 this year). “I want that money working on a tax-deferred basis right away,” Blades says. He also invests in a mutual fund gift trust, which will serve as a college fund for his son, Nathan, 11, and daughter, Kelsey, 9.
Blades is a zealot when it comes to diversification, and he maintains a careful balance among funds that target various investing styles, market sectors and companies of different sizes. His investments are a mix of index funds and actively managed mutual funds, with a chunk of real-estate holdings and a slice of individual stocks.
At 46, Blades isn’t thinking of retiring anytime soon. “I try not to equate retirement with a specific dollar threshold, so I don’t have a predetermined age or asset level,” he says. “My goal is to double my assets every five years.” He’s already met that goal several times over the years, and his portfolio continues to grow at a steady clip.
In Blades’s investing strategy, the funds he picks and the way he mixes them are of equal importance. Before you begin experimenting with funds in your own investment recipe, you’ll need to think about your investment goals, time horizon and tolerance for risk. “You don’t just decide to run a marathon,” says Keith Newcomb, a Nashville financial planner. “You must prepare and assess the landscape. The single most important thing to do is lay the foundation before you start picking your investments.”
This article will give you the tools to construct your own portfolio, as well as suggest well-diversified model portfolios you can adopt as your own. Each of our models contains one portfolio of actively managed funds and one made up of lower-cost index funds.
History proves that different types of stocks take turns leading the market. Some go out of favor — or go gangbusters — for years at a time. The past five years, for example, have been unkind to funds that invest in stocks of big, growing companies. Meanwhile, funds that specialize in small and midsize companies that are underpriced have enjoyed supercharged returns. Many analysts and money managers now believe that the tide is turning to favor large-company growth stocks once again.
Such shifts in style are largely unpredictable, so you won’t have steady growth if you invest in only one type of stock. “The more diversified, the smoother and safer the portfolio will be on the way from point A to point B,” says Newcomb. “While some funds may fluctuate wildly, the basket is going to fluctuate less overall.”
Given that over long periods of time small-company stocks provide greater returns than large-company stocks, you’ll want at least one fund that invests in the little guys. But because stocks of small companies are riskier, you should also devote space in your portfolio to larger companies, which are less volatile. Invest in funds that seek growth stocks as well as those that specialize in value stocks. Growth companies are typically those with rapidly accelerating sales and profits, while value stocks aren’t growing as quickly and are considered cheap relative to their peers.