Women's Worth by Eleanor Blayney

Author:Eleanor Blayney
Language: eng
Format: epub
Tags: women, personal finance, financial security, financial planning, women and finance, eleanor blayney, certified financial professional, cfp
Publisher: Eleanor Blayney

Choosing which markets to invest in and in what proportion—an activity called asset allocation—is one of the most important decisions an investor can make.

Choosing which markets to invest in and in what proportion—an activity called asset allocation—is one of the most important decisions an investor can make. It is also often the most confusing. How many equity classes are too many? How many bond classes are too few? Your answer to these questions depends in part on the size of your investable portfolio: the more you have to invest, the more differentiation you can accommodate in the portfolio. But the more important criterion for adding asset classes to your portfolio is true value added. If by adding a market or class of security to your portfolio you can increase your expected return or lower the risk of your investments or both, then the addition makes sense: it has improved your expected outcome. If, on the other hand, the only reason you add a class of asset is simply because it has been defined as different and distinct from your other investments—by product providers or salespeople or the latest investment newsletter—you are merely incurring more cost and confusion in your portfolio management.

As in so many other aspects of personal financial management, keeping it simple does not mean being simpleminded. You can keep it simple by investing in the following four markets: money markets, U.S. government bonds, U.S. stocks, and international stocks. Each of these categories represents a huge market, but they are sufficiently different in their return and risk characteristics to be considered positive additions to your portfolio. Furthermore, these markets are efficient in the sense discussed above: they are broadly and continuously traded and, therefore, reflective of reliable value over the long term. Using this efficient market criterion generally eliminates from consideration emerging market securities, micro-stocks or stocks of extremely small companies, private equity or debt, and even individual municipal securities. Information is not widely disseminated and trading is sporadic with respect to these investments, leading to erratic and unpredictable returns. In our simple, but not simpleminded, approach, unpredictable implies unacceptable risk.

To determine in what proportions to invest in these four categories, start by dividing your portfolio into two parts. The first will consist of money you will need to spend or withdraw from the portfolio within the next five to ten years. You may require this money for tuition payments or a down payment on a home, for example. If you are retired, you might need living expenses not covered by your pension or social security benefits. (Exclude any money you need more or less immediately or any set aside for an emergency fund; these sums are not part of your investable portfolio and belong strictly in a separate bank account or money market account.) The second part of your portfolio will consist of investments that are truly long-term and not needed for the foreseeable future.

Invest the first part of your portfolio in money markets and U.S. government bonds,

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