3.07.2006

TIP: Ways to Watch Your Financial Weight

via WSJ - Want to get a better grip on your investment portfolio and your overall finances? Try doing the splits. Your goal: To divvy up your money in a slew of different ways, so you look at your financial life from a variety of angles. To that end, try these 10 simple calculations.
  • Stocks vs. Bonds. Start by figuring out your portfolio's basic split between stocks and more conservative investments, like bonds, money-market funds and certificates of deposit. This is the biggest driver of your portfolio's risk and return...
  • Taxable vs. Tax-Sheltered. Next, calculate how much you have in your regular taxable account and how much in tax-sheltered accounts, such as 401(k) plans, individual retirement accounts and Roth IRAs... if you spend your Roth's investment earnings or you pull money out of any other type of retirement account, you could get slapped with income taxes and tax penalties.
  • U.S. vs. Foreign. ...A decent helping of foreign stocks is critical to a well-diversified portfolio, so I would aim to have 25% or 30% abroad...Consider 2005. Sure, both U.S. and foreign stocks climbed. But there was a huge disparity in performance, with the Standard & Poor's 500-stock index up just 4.9%, while Morgan Stanley Capital International's Europe, Australasia and Far East index leapt 13.5%.
  • Large vs. Small. ...Three-quarters of the U.S. market is accounted for by the big blue-chip stocks in the S&P 500, with smaller companies accounting for the other quarter... If you're an investment junkie, also diversify your foreign stocks. Begin with a core position in a foreign fund that owns large companies in developed markets. Next, tack on exposure to small stocks, through an international small-cap fund, and small markets, through an emerging-markets fund.
  • Growth vs. Value. ...You really want to own both types of stocks. My advice: Purchase a total-market-index fund. That will give you exposure to all U.S. stocks -- large, small, growth and value -- in a single mutual fund.
  • Active vs. Indexed. When you invest, there isn't just the risk you will lose money. There's also a chance the markets will roar ahead -- and your investments will be left behind. To gauge your "active risk," tote up your holdings of actively managed mutual funds and individual stocks and bonds. Want to reduce the risk of market-lagging performance? Stash more of your portfolio in index funds, thus locking in the performance of the underlying markets.
  • Financial vs. Real. Financial assets, like stocks and bonds, offer a low-cost, convenient way to build wealth over the long run. But these investments will likely suffer steep short-term losses if inflation takes off. In that scenario, however, you should see decent gains from real assets like gold, commodities and real estate. Inflation-indexed bonds, while technically a financial asset, would also fare well. The lesson: While conventional stocks and bonds should be your core investment, consider buying yourself some inflation protection by allocating a little money to real assets.
  • Assets vs. Liabilities. Add up the value of your home and all your investments, and then compare that to your total debts, including your mortgage, student loans, credit-card balances and auto loans...

Category: C++ Quant > Random Walk

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