Designing The Perfect Portfolio
Believe it or not, the overall strategy is no more complex than any well-thought-out business plan. When you get to the plan's "fine tuning," the waters can get a little muddy, but the master plan is something anyone can do. It consists of three phases, and when you complete each phase in order, you may find yourself pleasantly surprised.
The first phase is top-down asset allocation. In this phase, you take a step back and you need to analyze who you are, where you are and where you want to be. Once you have this base, you then need to analyze your current portfolio to see if it fits with your goals. Do you need more or less growth? More or less income? More or less liquidity? More or less tax relief? By answering these questions, you can then prepare an ideal portfolio -- on paper.
Naturally, what works on paper may not work in reality. So you will need to massage the portfolio, still staying with major asset classifications and strategies, until the overall portfolio's master plan works for you. And perhaps more importantly, until you can sleep with it.
Phase Two is the bottom-up asset allocation phase. You now know, for example, that you wish to have 20 percent of your assets in conservative growth. Of this 20 percent, half is to be in proven stock funds (managed growth) and the other half in individually selected stocks (self-directed growth).
Now for the difficult part. Of the more than 10,000 different mutual funds and/or ETFs available, which one or ones are best for your particular goals in this portfolio? And of the 50,000-plus stocks, which show the most promise for the least amount of relative risks?
Needless to say, this same bottom-up analysis needs to be applied to all other asset classifications (bonds, annuities, hard assets, etc.) and tax-management strategies (tax shelters, annuities, individual retirement accounts, etc.).
Phase Three involves ongoing reviews. There is no one approach or investment that is perfect for all times. If whole mountain ranges can be destroyed by blowing grains of sand, then so can the best-designed portfolios.
Reviews need to be complete and frequent, at least twice a year. And we don't mean cursory reviews but rather, a full and complete review of each asset from both the top-down and the bottom-up points of view.
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The first phase is top-down asset allocation. In this phase, you take a step back and you need to analyze who you are, where you are and where you want to be. Once you have this base, you then need to analyze your current portfolio to see if it fits with your goals. Do you need more or less growth? More or less income? More or less liquidity? More or less tax relief? By answering these questions, you can then prepare an ideal portfolio -- on paper.
Naturally, what works on paper may not work in reality. So you will need to massage the portfolio, still staying with major asset classifications and strategies, until the overall portfolio's master plan works for you. And perhaps more importantly, until you can sleep with it.
Phase Two is the bottom-up asset allocation phase. You now know, for example, that you wish to have 20 percent of your assets in conservative growth. Of this 20 percent, half is to be in proven stock funds (managed growth) and the other half in individually selected stocks (self-directed growth).
Now for the difficult part. Of the more than 10,000 different mutual funds and/or ETFs available, which one or ones are best for your particular goals in this portfolio? And of the 50,000-plus stocks, which show the most promise for the least amount of relative risks?
Needless to say, this same bottom-up analysis needs to be applied to all other asset classifications (bonds, annuities, hard assets, etc.) and tax-management strategies (tax shelters, annuities, individual retirement accounts, etc.).
Phase Three involves ongoing reviews. There is no one approach or investment that is perfect for all times. If whole mountain ranges can be destroyed by blowing grains of sand, then so can the best-designed portfolios.
Reviews need to be complete and frequent, at least twice a year. And we don't mean cursory reviews but rather, a full and complete review of each asset from both the top-down and the bottom-up points of view.
* * * * *
posted by Bob Moser at
8:17 PM
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