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Getting Personal With Your Portfolio


What to look for, what to avoid and tips on making your portfolio the best it can be.


Define your needs and goals to determine the right mix of investments when developing your portfolio.

This includes determining your risk tolerance and time horizon – how long you plan to stay invested before you need the cash. Both factors differ depending on your goal: investing for retirement, your children's education, or simply hoping to beat the market and pocket a hefty profit.

Then take a hard look at what you can lose in a market downturn.

"The basic mistake many investors make is allocating assets according to potential return rather than possible loss," says John Succo, a Minyanville professor and co-founder of Vicis Capital, a hedge fund. "They look at how much they think they can make more than they look at how much they can lose."

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Determine how you want to spread your investments among stocks, bonds and cash to reduce risk. Diversification is a fancy word for your grandmother's wisdom: Don't put all you eggs in one basket. Remember that you want to be diversified within and between asset categories.

You may also want to consider gold as a hedge against inflation. (See Is Gold Right For You? for more information.)

Time Is Money

Your investment goals, willingness to take on risk and time horizon are inter-related and will help point you to the type of investments that best fit your needs.

Here's how: If you're young and just starting out, consider investing heavily in stocks offering solid growth potential while limiting your bond and cash holdings. But as you move closer to retirement or freshman composition for your kid, you'll probably want to move a significant portion of your holdings to lower-risk investments because there's less time to make up any losses before you need the money.

Don't overlook Exchange Traded Funds, or ETFs, which represent a basket of stocks and provide diversification that few investors can match. Unlike mutual funds, ETFs aren't actively managed and this keeps costs low. (See: ETFs Explained)

What Types of Investments Are Right For You?

After nailing down how much risk you can handle without your stomach doing back-flips and determining when you'll cash out your investments, start looking at the types of investments you want to hold. Remember: Higher risk may produce greater rewards, but you also increase the possibility of getting pounded in a market downturn.

  • Bonds are generally safer investments than stocks, especially those in a volatile sector, but typically generate lower returns. Trading performance for safety is part of balancing your portfolio.

  • Cash is the safest investment, but the returns may be low and your yield is likely to be eroded by inflation. In most cases, that means cash represents a small part of your portfolio. (See: CDARS: Seeing The Forest For The Trees)

  • IPOs are as enticing as the blonde in the Thunderbird who cruised through the movie American Graffiti but generally aren't good long-term investments. It's difficult for The Little Guy to get an allocation of shares at the offer price and a new issue's volatility can chew a hole in your returns. (See: Looking For A Hot IPO?)

It's difficult for individual investors to build and maintain a winning portfolio on their own and many therefore turn to mutual funds, or a pool of money handled by professional managers. Your initial steps in determining the components of your portfolio will help you determine the best mutual fund to meet your needs. Management fees vary, so shop around.

Take a look at asset allocation funds that offer a varied mix of stocks, bonds and other holdings to meet the goals of different investors.

Fine Tuning

Rebalance your portfolio as needed to bring it back to your original asset allocation mix, or close to it. If, for example, you've decided to make stocks 60% of your holdings, a recent run-up in price may increase the value of your equity holdings to 75% or 80%, making you vulnerable to a market downturn. That's why it's important to keep an eye on your holdings and rebalance your portfolio as needed.

This allows you to sell off assets in over-weighted categories and use the money raised to purchase investments in under-weighted asset categories. If you're making automatic contributions to your investments, you can alter the flow of money to under-weighted types of investments until you've spread the risk and your portfolio is back in balance.

You may want to shift some of your money away from an asset class that's generating solid returns to a category that's lagging. That sounds backward, but it allows you to sell high and buy low. If you do your homework, you then can buy future winners at a good price.

While your financial goal is likely to remain constant, factors affecting your investments constantly change and nothing is carved in stone. Always keep a wary eye on your portfolio and make changes as needed.

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