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Portfolio Lesson
We are going to learn about an investment portfolio. Professional manager’s focus on balancing their assets to help control risk. Risk management is a very important part of a good investment managers responsibility. When choosing a broker you really need to check their past record and try to evaluate their risk results record. Investments such as real-estate, stocks, bonds, mutual funds, precious metals, options etc... can be held in your portfolio. One of the most important things you can do with your portfolio is to diversify because you don’t want to have all of your funds in one sector or type of investment because if that sector or type of investment takes a sudden down turn your entire portfolio can be wiped out.
How to Balance Your Portfolio In order to balance your assets you should look at the types of assets you have. A nice balance may be 25% equity (stocks), 25% bonds, 35% real estate and 15% cash. The allocation could change according to market conditions at the time. The idea is to be in a position where if one asset goes down another goes up helping to maintain the balance in your earnings and protecting you from catastrophic loss. Asset allocation for a 20 year old would be different than for a 50 year old because their time to retirement would be very different. The 20 year old has a longer time for the assets to grow so they can take a little more risk because there would be time for the assets to recover from a down turn in the economy. The 20 year old may allocate 50% to equity, 5% bonds, 35% real estate and 10% cash. None of these are cast in stone because the most important factor is your own personal feelings about risk and your comfort with the different types of assets. It’s what you are comfortable with but the most important thing is that you don’t put all of your eggs in one basket.
Common Stock If you have common stock in your portfolio you have to decide on what type of companies you want to invest in and research that industry to determine the best individual companies in that industry. You may want to look for up and coming companies and evaluate their business plan to determine if you think they may have something new and different that will give them an advantage in the industry and cause their stock to rise faster than others. There may be companies that you feel are not doing the right thing so you may want to consider selling them short. You just need to be careful with this strategy because you don’t want to get caught owning a company that goes bankrupt.Common Stock Lesson Learn more about investing in common stock, visit the Common Stock Lesson. Real Estate Real estate is one of my favorite investments because as the old saying goes “They Aint Making No More Land”. My favorite thing to do is take some of the profits that I make from equities and use it to purchase real estate. I personally like rental property because I can take advantage of the appreciation in the real estate market and have an asset that can help take care of me when I retire. I like rental properties because I can purchase the property, find a tenant to pay me enough rent to cover the monthly payments of principal, interest, taxes and expenses. As the property appreciates over time I refinance the loan, take out the extra cash tax free and let the tenant continue to make the payments for me. I also get to take advantage of business tax deductions to help reduce my taxable income including depreciation on the property. I then take the cash that I take out to use to purchase additional property. I don’t try to do no down payment type of investment because I think it is very difficult to do and you increase your risk because you have a lot more debt and in the current market it is hard to get anybody to give you a 100% loan. I also think it is more difficult to find properties that you can get 100% financing because you usually have to find someone that is desperate to sell their property or someone that doesn’t need their cash right away. I generally plan to invest 30% of my own funds in a rental property. Anything less really makes it hard to collect enough rent to cover your mortgage and expenses. It’s almost impossible to cover your mortgage and expenses if you have a 100% loan. I know this doesn’t sound as glamorous as some of the real estate guru’s you see on television but I promise you this has worked for me. You really only need to come up with the 30% once because your next down payment should come from equity appreciation in your first property.
Diversification It is very important to diversify your investment portfolio. You never want to put all your money in one sector of the market or one type of asset. I have heard several stories of people that put all of their retirement money in Lehman Bros because they thought they were a big solid company that would never go bankrupt. Now those people have lost their life savings and have to start all over again. I can’t say it enough DO NOT PUT ALL OF YOUR EGGS IN ONE BASKET!!!! You should keep some of your assets in cash because you never know when an investment opportunity will arise. For example if the stock market takes a down turn and you have cash available to invest you can purchase shares of companies that you feel are only down because everything else in the sector is down but they are doing things right and will recover quicker than the market. This is an opportunity to purchase the company at a bargain price and put yourself in a position to make some serious profits when the market comes back. The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
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