GETTING AN INVESTING GAME PLANCreating It, Working It, Winning It phần 5

90 Step 5: Get an Offense and a Defense Francisco 49er football team, the first team in history to win five Super Bowls. The team’s coaches were careful to bring together players who per-formed exceptionally well in their positions but who also were outstanding in their interaction with one another. Sure, there may have been a few stars like quarterback Joe Montana and wide receiver Jerry Rice, but they wouldn’t have been heroes without the very capable players who backed them up. (Cowboy fans: I know your team did great too, just a little later.) To follow that analogy, stocks are considered offensive because, while risky, they can offer unlimited upside. Bonds are considered de-fensive because they are a fixed-income investment with a company or government guarantee and a definite maturity period. While their mar-ket value may fluctuate during the holding period, they are considered more stable than stocks. Then there’s the special team idea. This relates to industries that at times outperform the overall market. In football a special team is used for various plays and strategies—for instance, a kicking team or a receiving team. In investing that could mean bringing in a manager who special-izes in a sector like health care or technology. In sum, every investor needs a good offense and a good defense. Oc-casionally a special team can give an added kick to a portfolio. Together, an offense and a defense provide diversification. Diversification—the right offense/defense balance—is achieved through allocation. There are three levels to the allocation process. They are: 1. Allocating among stocks, bonds, and cash. 2. Allocating by fund style, such as dividing your money between large-cap blend and small-cap value funds. 3. Allocating by picking the actual mutual funds to match the styles. The importance of a well-thought-out allocation plan was under-scored by a study done by Gary Brinson, one of the world’s most re-spected money managers. He analyzed several pension plans and determined that up to 90 percent of the portfolio’s returns resulted from how they were allocated. I think there are also other important compo-nents that affect the outcome of a given portfolio. Skilled managers and Four Sample Portfolios 91 their ability to navigate fickle markets also play a role in the success of an investing game plan. But if I had to point to one main factor in the success of an individ-ual’s financial investments, it would be allocation. Winning the Loser’s Game, investment guru Charles Ellis’ landmark book, put it well. Ellis wrote that wisely formulated investment policy was the foundation for constructing and managing portfolios over time. And asset mix, he said, was the single most important dimension of investment policy. In this chapter, I discuss asset mix and styles—allocation levels one and two. Chapter 6 discusses picking funds—allocation level three. And Chapter 7 brings it all together with examples. Four Sample Portfolios With few exceptions every investment portfolio for any investor of any age or income should have an offense and a defense. The question is one of proportion. How much offense? How much defense? This chapter provides four basic model portfolios: conservative, moderate, aggressive, and the bunker. With conservative, the emphasis is on defense; with aggressive, on offense. Moderate falls nicely in the mid-dle. The bunker stands apart from the other three portfolios. It is on the Hayden Play: Whatever your age, get an offense and a defense. Age gets too much focus in most financial planning assessments. Just be-cause you’re young doesn’t mean you should be ultra-aggressive and lose all of your money. You can never really make up for time. In fact, youth is when you should be growing your money, not losing it. It is the early money you invest that compounds and grows the most dramatically over time. At the other extreme, there is no set age at which you can’t afford some upside risk. Any age can warrant an investing offense and an invest-ing defense. 92 Step 5: Get an Offense and a Defense far defensive end of the risk spectrum and should be reserved for use in extreme bear markets, like that of 2000–2002. The models are just that—models. They’re meant as a starting point. If you are working with an advisor and/or are doing significant research yourself, you may well want to tweak these models to create a customized portfolio that fits your needs. Indeed, many readers are surely holding some “legacy” investments, and it’s not always easy to convert one’s pre-sent portfolio to match a model overnight. There are factors to consider like the tax implications of selling, as well as current market conditions and personal financial circumstances. These model portfolios are meant as a guide, not rigid rules. The four portfolios are designed roughly to achieve the return-rate ranges we discussed when you developed your goals in Chapter 3. The conservative portfolio is designed to reap a 5 to 6 percent annual return, the moderate portfolio is expected to return 7 to 8 percent, while the ag-gressive portfolio is aimed at returning 9 percent a year or more on aver-age. Depending on how much of a bear market you’re dealing with, the bunker portfolio would return anywhere from 3 to 6 percent, overlapping somewhat with the conservative portfolio. (As I mentioned earlier, these return rates are guidelines based on historical patterns and future expec-tations. They are not predictions for actual annual return rates year in and year out. Nor can they be guaranteed. Actual returns might be higher in hypergrowth periods but lower in down markets.) Many financial planning guides slice and dice portfolios into far more than four options. There’s income, ultra-conservative, ultra-aggressive. But for all the micromanagement, I’ve found that the three basic portfo-lios—that is, the conservative, moderate, and aggressive—will service nearly all investors well. In fact, the moderate will take care of the lion’s share, no matter what your age, circumstances, or income. There is, of course, one exception. That’s the bunker portfolio. Based on what happened in the bear market of 2000–2002, I felt many of my clients needed a fourth kind of portfolio. When the market gets really tough, the moderate portfolio can take on the feel of an ultra-aggressive allocation. The bunker portfolio keeps you a bit in the market while pro-viding hefty cushion from knockout blows. This portfolio is for people Four Sample Portfolios 93 that cannot or should not hang in there with a buy-and-hold philosophy. In an extreme up market, I still feel the aggressive portfolio is the most risk I like my clients to take. Bear markets aside, most people belong in the moderate portfolio, some in conservative, and a select few in aggressive. I almost always start a new client out with a moderate-risk portfolio. It has been the right de-cision for at least 80 percent of my clients. Why? Because it’s very hard to judge up front how much risk some-one can handle. If you go with the moderate portfolio and find you want less or more risk down the road, you can more easily adjust your portfo-lio’s allocation strategy along the way if it is not on either extreme of the spectrum. Only once have I been chastised by a client for not starting with an aggressive portfolio. That happened in the late 1990s when the bullish stock market seemed like a no-lose proposition. By the time the bears took over in 2000-2002, that same client wished she had gone with the original moderate portfolio. Trust me here. If there is any question about how much risk to take, always start out with a lower-risk portfolio. To make this point more clear, let’s look at two different allocation scenarios. Imagine you have $100,000 to invest. One portfolio is in-vested extremely aggressively—about 95 percent of the money is in equi-ties. The other is diversified with 65 percent in equities and the remainder in fixed-income securities and cash. Now, I ask you, which of these portfolios would you have stuck with over the three-year period outlined in Table 5.1? If you are like many of the people I’ve proposed this to, you would have run for the hills at some point in the second year if you were in the aggressive portfolio. That means you wouldn’t have been in the invest-ment in the third year to reach the winning $135,000. If you had been getting a steady 10 percent annual return in the moderate portfolio, however, you would have had $133,000 in your bank account. Sure, that’s $2,000 less than if you white-knuckled it through the aggressive approach. But it’s a heck of a lot more than you’d have had if you bailed out of the aggressive portfolio in midstream. 94 Step 5: Get an Offense and a Defense Table 5.1 Aggressive Growth versus Moderate Risk Initial investment Year 1 Year 2 Year 3 Final portfolio value Aggressive $100,000 +80% –50% +50% $135,000 Moderate $100,000 +10% +10% +10% $133,000 Note: The hypothetical investment results are for illustrative pur-poses only and should not be deemed a representation of past or fu-ture results. Actual investment results may be more or less than those shown. This does not represent any specific product or service. It all comes down to the importance of understanding the distinc-tion between intellectual and emotional risk, an element of the risk tol-erance issue discussed in Chapter 2. Your intellectual tolerance level has to do with your mind and how your thought process responds to informa-tion. Your emotional tolerance level has to do with feelings and how your heart navigates a given situation. Initially many clients tell me that they know they can handle a 20 percent drop in their portfolios. I respect their statement, but I don’t al-ways believe it. Why? Because they’re considering the future intellectu-ally. In most cases when folks say that, they have never experienced the emotion that can follow a dramatic plunge in an investment’s value. I have found that when intellect and emotions are in conflict with regard to money, the emotions generally rule. The great majority of peo-ple emotionally overreact to volatility, with negative consequences for their commitment to a consistent investment game plan. That is why I start 80 percent of my clients with a moderate portfolio. If you feel you are among those select few who can stand the downs along with the ups, consider the aggressive portfolio. But realize that this means that while you might win big, you might lose big, too. All in-vestors face the challenge of determining the level of risk they can han-dle and then picking the appropriate portfolio to reflect that level. Whatever your ultimate choice, your portfolio should be one with gen- ... - tailieumienphi.vn