Figuring out how much risk to take in a portfolio can seem like a simple calculation, but for most people, emotions tend to make the process more challenging. On the surface, we all know risk is a necessary component of investing, but finding the right amount of risk to achieve our goals is more complicated than just picking a number between one and ten.
There are many factors that determine how risky an investment is. (more…)
What’s the best asset mix for you? You already know that your two major options are stocks and bonds. The choice between them represents a basic tradeoff: growth vs. stability. Investing in stocks is more likely to produce higher returns than investing in bonds, but with more volatility. (more…)
Industry specific jargon can be intimidating. Fortunately, you can leave most of it to the experts. The six terms listed below are the exceptions – understanding them is crucial to your long term investment success.
Fiduciary. Someone who is legally obligated to put your interests ahead of theirs. In the investment world, Registered Investment Advisors (RIAs) have a Fiduciary responsibility. Stockbrokers do not. The difference is dramatic. Do yourself a favor and make sure you work with someone who is legally obligated to put your interests first so that you can prosper.
Market index. Indices are measuring sticks for different sections of the market. A good example is the S&P 500, which represents the 500 largest companies in the United States. Understanding the indices allows you to track your relative performance. To do so, it’s important to understand which indices are fair representations of your portfolio. Using the S&P as a barometer against a portfolio of international stocks, for instance, does not make sense. In this case, using the EAFE Index (Europe, Asia and Far East) would be suitable.
Personal risk tolerance. In its simplest sense, how much of your portfolio should be allocated to stocks and how much to bonds? The answer depends upon your unique set of goals and circumstances. Remember – it is a personal risk tolerance. Speak with a Certified Financial Planner™ to guide you to an answer.
Stock risk. Ever heard the saying “don’t put all your eggs in one basket?” While some companies may seem like a sure thing, remember this – the S&P 500 of 1960 looked much different than the S&P 500 of today. Times change, companies grow and others fail to meet changing demands of the world. Eastman Kodak and Enron come to mind. Successful investors use diversification to increase their long-term risk adjusted return.
Loaded mutual funds. A front-end load is recognized when you purchase a mutual fund. A back-end load is recognized when you sell one. Choose their no-load counterpart. You will save the fee and the performance is more often than not just as good. After all, a no-load fund has a head start in the amount of the load, which can be upwards of 4% in some instances.
Pundit. Someone who prognosticates, in this case, about the financial markets. Their pedigree may be impressive and their intellect alluring, but do not follow their advice. No doubt they made a few good calls in their day. Chances are they made more bad ones. Your best bet is to develop a long-term strategy with your financial advisor that you can stick to. One that is tailored to your specific needs and goals.
Every year, we update some of the core articles in our Best of Merriman library.
The 2012 update of The ultimate buy-and-hold strategy, which includes performance information through 2011, is now available in our Best of Merriman library.
