What is your "Road Map" to building an investment strategy? More specifically, how are you going to go about constructing a portfolio that will prepare for your retirement years or other investment needs. Beginning investors need to lay out an initial investment plan. Take a deep breath and above all, set aside quality time to carefully lay out your investment "Road Map." Assume changes or portfolio modifications will follow as one becomes more familiar with investing. But at least start with some savings plan. Apply the philosophy, invest as much as you can as early as you can. As one begins to save, the decision of what to do with the money becomes a challenge. If you have a plan, investment decisions will be much easier. This Asset Allocation section will provide guidelines for laying out an investment plan. Since different industries, market sectors, and asset classes perform at different levels during various market cycles, it behoves one to diversify investments over a variety of asset classes. Click here or here to see how various asset classes have performed over time. Establishing an asset allocation plan for a portfolio is an important first step toward successful investing. Below are some guidelines and helpful hints.
1.1 Determine an overall plan for a broad portfolio establishing
percentage guidelines for each asset class. Several sample spreadsheets
are available at this location. Click here. 1.2 Divide the portfolio into growth and value investments. Use Morningstar guidelines. In some cases the investment will fall into what is known as a core investment or somewhere between a value and growth investment. 1.3 Divide the portfolio into large, mid, and small-cap size. Some investors will prefer to use sales instead of cap size as the division points. Again, use Morningstar guidelines. 1.4 Determine if the portfolio should
include asset classes such as REITs, international, emerging markets,
precious metals, bonds, etc. Ronald J. Surz, Dale Stevens, and Mark Wimer in their article, "Investment Policy Explains All" write, "For those who thought that the question of policy importance had been conclusively asked and answered by the authors' (Brinson et. al.) study, we now say it wasn't. The critics' arguments do contain some truth -- and some errors. Investment policy is not only the most important contributor to performance -- it is even more important than originally thought." Later in the Surz et. al. article they write, "...this means that
investment policy explains 112% of the performance of the average fund
in the authors' study, a far greater number than originally suggested."
Regardless of what percentage of a portfolio performance is related to
how one allocates their assets, there seems to be little doubt that the
reward/risk ratio of a portfolio is enhanced if one properly plans
their portfolio. Several additional references advocating a well-developed portfolio can be found in the following books. "Four Pillars of Investing" by William Bernstein, "The Intelligent Asset Allocator" by William Bernstein, and "Asset Allocation: Balancing Financial Risk" by Roger C. Gibson. 2.0 Sample Asset Allocation If you are looking for an example portfolio, check out the endowment portfolio found at this URL. Look for the Endowment.xls file and download. Note how the portfolio is skewed to the value side of the investment spectrum. The reason for the higher value targets is due to historical data. Over the past fifteen years of data, value index funds outperformed growth index funds by a significant percentage. Using the historical data is the reason for placing more emphasis on value oriented investments. Comment on this Page Last Modified 2005-12-02 |
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