More Bang for Your Buck
Three aspects of investment planning can help improve your portfolio.
By former Army Capt. Phil Dyer, CFP, Deputy Director, Benefits Information

This segment of “Financial Planning 101” will help you build an investment portfolio by focusing on three key areas: asset types, time frame, and asset allocation.

Asset Types. Financial advisors’ definitions of asset types can vary greatly, so we’ll start by defining the major asset types.

Cash and cash equivalents encompasses traditional checking and savings accounts, credit union accounts, short-term CDs, and high-yield deposit accounts, such as the MBNA account available through MOAA.

Bonds and bond mutual funds is a broad category that includes government, municipal, and corporate bonds and bond funds. Real estate investment trusts are another example of income-generating holdings.

Large company stocks and mutual funds can be well-established companies, many of which pay dividends.

Small and mid-size company stocks tend to be more volatile and risky than their larger cousins but might offer higher returns over time.

International stocks and stock mutual funds are non-U.S.-based companies that move in slightly different cycles than U.S.-based stocks.

Time Frame. The first step in starting your investment plan is to determine when you need the money. Consider dividing your investment time horizon into short-term, intermediate-term, and long-term categories.

If you have short-term (within two years) capital needs, that money should not be risked in the stock market. Short-term CD ladders and high-yield deposit accounts are much better options. Also, if you are retired, consider keeping two years’ worth of living expenses in liquid investments. This safety net can be a comfort when the stock market declines.

The intermediate-term (two to five years) category is the province of income strategy investments, where you can afford to take slightly higher risks in return for a higher yield. For instance, if you need to replace an automobile in four years, you can buy high-quality bonds that mature when you plan to buy the new car.

Long-term (five years or more) money typically will be concentrated in stocks or stock mutual funds; should include large, small and mid-size, and international holdings; and have value and growth offerings.

Asset Allocation. Studies have shown that up to 96 percent of the return on an investment portfolio is due to proper asset allocation, with factors such as market timing and individual investment selection influencing the remaining 4 percent. The past five years’ market turmoil shows the value of having a diversified, properly allocated investment portfolio. The amount you put into each asset type will vary according to your risk tolerance, long-term financial goals, and time horizon.

Rebalance your asset allocation once a year and reallocate as needed to adjust for changing life situations. Don’t stray from your asset allocation because of short-term market swings. Jumping in and out of the market—called market timing—is a losing strategy for most individual investors.

Next month, the “Financial Planning 101” series will continue with a look at insurance planning.

Asset allocation models