The recent stock market rally offers a good opportunity to take profits (or reduce losses, as the case may be) and seriously consider diversifying away from the stock market. Investors who have a high tolerance for risk and long-time horizon before retirement may want to stay in with a higher percentage of their portfolios and ride the waves, so to speak. Every individual has their own “optimal” investment portfolio based on several factors, including risk tolerance, retirement goals, and age. However, in general, the current stock market environment presents too much risk for too little return.
Some investing professionals caution their clients not to pay attention to day-to-day moves in the stock market. That’s understandable because daily volatility is not necessarily indicative of a long-term trend—put simply, no stock goes straight up or straight down. Unfortunately, the cloud of uncertainty hanging over the economy continues to exacerbate daily movement in individual stocks. For instance, if one company in a given industry reports poor earnings, every company’s stock that participates in the same industry is treated as if it reported poor earnings. This can, and has, resulted in one-day declines of 10- or 20-percent or more in certain stock prices.
That single decline can take a long time to recover, even though the particular company has done nothing wrong and simply has competitors who are struggling (shouldn’t that be positive for the well-run company?). The math is fairly straightforward: if a stock at $10/share drops 20-percent in one day to $8/share, it now needs to go up 25 percent to get back to $10. While that happens as well in this market (uncertainty can exaggerate prices in both directions), it is more unlikely. Instead, the investor is forced to either be patient and wait for the market to realize that the company is in good shape or sell at a loss (or loss of profit) to move the funds to a better investment. Those are not exciting choices, and this underscores the risk in investing in the stock market for the forseeable future.
An article at Bloomberg.com yesterday highlights this issue as well, and is worth reading. If you would like to review it, please click on the following link: Diversify Your Investments Even If It Hurts: Jane Bryant Quinn.
Although I prefer to tailor an investment portfolio to an individual investor’s profile, if I were to construct a general model portfolio it would look something like this:
25 percent: U.S. Stocks (10% GOOG, 10% MCD, 10% XOM, 10% CVX, 10% CSCO, 10% CELG, 10% GIS, 10% BBY, 10% EXM, 10% MOS)
20 percent: International Stocks (25% FXI-China, 25% EWZ-Brazil, 50% EEM-Emerging Markets)
15 percent: Treasury Inflation-Protected Securities (100% TIP fund, or buy individual TIPS)
10 percent: Precious Metals (100% DBP)
10 percent: Corporate Bonds (100% LQD – investment grade ETF)
10 percent: Municipal Bonds (Buy these individually, in-state for full tax advantage)
10 percent: Money market fund or long-term treasuries (TLT)
This is just a generalized model portfolio – a skeleton, if you will, off which one may add customization to achieve an optimal investment portfolio.
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Gregg D. Killoren
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Diversification: Reduce Exposure to the Stock Market
The recent stock market rally offers a good opportunity to take profits (or reduce losses, as the case may be) and seriously consider diversifying away from the stock market. Investors who have a high tolerance for risk and long-time horizon before retirement may want to stay in with a higher percentage of their portfolios and ride the waves, so to speak. Every individual has their own “optimal” investment portfolio based on several factors, including risk tolerance, retirement goals, and age. However, in general, the current stock market environment presents too much risk for too little return.
Some investing professionals caution their clients not to pay attention to day-to-day moves in the stock market. That’s understandable because daily volatility is not necessarily indicative of a long-term trend—put simply, no stock goes straight up or straight down. Unfortunately, the cloud of uncertainty hanging over the economy continues to exacerbate daily movement in individual stocks. For instance, if one company in a given industry reports poor earnings, every company’s stock that participates in the same industry is treated as if it reported poor earnings. This can, and has, resulted in one-day declines of 10- or 20-percent or more in certain stock prices.
That single decline can take a long time to recover, even though the particular company has done nothing wrong and simply has competitors who are struggling (shouldn’t that be positive for the well-run company?). The math is fairly straightforward: if a stock at $10/share drops 20-percent in one day to $8/share, it now needs to go up 25 percent to get back to $10. While that happens as well in this market (uncertainty can exaggerate prices in both directions), it is more unlikely. Instead, the investor is forced to either be patient and wait for the market to realize that the company is in good shape or sell at a loss (or loss of profit) to move the funds to a better investment. Those are not exciting choices, and this underscores the risk in investing in the stock market for the forseeable future.
An article at Bloomberg.com yesterday highlights this issue as well, and is worth reading. If you would like to review it, please click on the following link: Diversify Your Investments Even If It Hurts: Jane Bryant Quinn.
Although I prefer to tailor an investment portfolio to an individual investor’s profile, if I were to construct a general model portfolio it would look something like this:
25 percent: U.S. Stocks (10% GOOG, 10% MCD, 10% XOM, 10% CVX, 10% CSCO, 10% CELG, 10% GIS, 10% BBY, 10% EXM, 10% MOS)
20 percent: International Stocks (25% FXI-China, 25% EWZ-Brazil, 50% EEM-Emerging Markets)
15 percent: Treasury Inflation-Protected Securities (100% TIP fund, or buy individual TIPS)
10 percent: Precious Metals (100% DBP)
10 percent: Corporate Bonds (100% LQD – investment grade ETF)
10 percent: Municipal Bonds (Buy these individually, in-state for full tax advantage)
10 percent: Money market fund or long-term treasuries (TLT)
This is just a generalized model portfolio – a skeleton, if you will, off which one may add customization to achieve an optimal investment portfolio.
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