How to Build Your Own “Profit Dashboard”
Warren Buffett once expressed an investment truism this way: “No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
Translation: If you want to get rich, you must patiently pursue time-proven methods.
A good place to start is to consider your long-term investment needs based on your stage in life. Armed with that data, the next phase is to establish your portfolio allocation dashboard.
To create a dashboard, I suggest these age-contingent categories: 1) relative youth (15 years from retirement); 2) middle age (5-15 years from retirement); and 3) advanced middle age/senior citizen (5 years from retirement).
For the three age categories, here are suggested allocations:
- Cash 10%; bonds 10%; stocks 70%; metals 10%
- Cash 25%; bonds 25%; stocks 25%; metals 25%
- Cash 55%; bonds 15%; stocks 15%; metals 15%
Of course, these are general suggestions. Tweak the percentages according to your own situation. Choose a category based not only on your approximate age, but also on your tolerance for risk.
As history amply shows, you’ll have to withstand a lot of bumps along the way. If your portfolio is heavily weighted toward stocks and the stock market takes a sharp turn for the worse when you’re in your 40s, you still have plenty of time to bounce back. That’s why our recommended allocations get safer as you get older.
But remember: If you’re still several years away from retirement, the safer you play it, the less effective your wealth-building plan.
As 2024 approaches and a new and raucous presidential election year gets underway, you should consider re-balancing your portfolio to accommodate the likely economic, business and market trends of the coming new year. In a year that’s bound to be fraught with volatility, diversification will provide an important buffer.
Protecting your portfolio from disaster…
You’ve doubtless heard the expression: “Don’t put all of your eggs in one basket.” The consequences of doing so can be disastrous. You should diversify not just across assets and market capitalization, but also across sectors.
Here are four guidelines to follow:
1) Diversify among stocks and sectors
Stocks that are Wall Street darlings one day can become goats the next. When the lemmings pile into a hot stock, it’s tempting to think you’ve found a sure thing, but the investment landscape is littered with the bleached bones of companies that once seemed like sure things.
Same rule applies to sectors. Consider the dot-com bubble that ran from 1995 to
2) Spread your money among several asset classes
Don’t just stick to components of the S&P 500 or the Dow Jones Industrial Average. Spread your portfolio among value, small-cap, large-cap, growth and dividend stocks.
3) Spread your investments geographically
Don’t simply focus on specific country or regional funds, or on emerging markets. The best course of action is to diversify around the world through international index funds.
As my colleague, Robert Rapier, recently wrote:
“As an investor, diversification is a key strategy to manage risk and enhance returns. While the U.S. stock market remains the world’s largest, there are compelling reasons to allocate a portion of your portfolio to international investments. Overseas markets often outperform U.S. markets due to unique local factors influencing each country’s business cycle.”
Robert is the chief investment strategist of our premium trading service, Income Forecaster. More about him in a minute.
4) Don’t neglect fixed income
The degree of fixed income you need depends on your age. The closer you get to retirement, the greater weighting you should place on fixed-income investments such as bonds.
No easy short cuts…
Many investors are becoming enamored with asset-allocation mutual funds, also known as “target date” funds, which try to provide investors with portfolio allocations predicated on their age, risk tolerance and investment objectives. However, even this “solution” is too standardized and doesn’t address highly individual requirements.
According to the financial research firm Ibbotson Associates, about a half-trillion dollars are now invested in target date funds. Target date funds are simple to use — you pick the target date fund that will mature closest to your designated retirement date.
These funds are typically issued in five-year increments — 2025, 2030, 2035, etc. As the target date approaches, the fund’s allocation grows more conservative. The exposure to equities is diminished as the allocation to bonds and cash increases, reducing risk and volatility.
Target date funds would seem to be the perfect solution to the challenge of asset allocation, but as Warren Buffett warned us, there are no easy shortcuts when it comes to investing.
It’s never advisable to put your investments on autopilot. One problem with target date funds is that their allocations are based on past returns, without accounting for the current market environment. Many also entail high expense burdens.
Stay focused on the economic big picture, not the markets’ quarter-to-quarter roller coaster rides. To be sure, you must calibrate your allocations according to existing conditions as well as projected future trends, but you should also ignore temporary market blips.
Got a question about asset allocation…or any other investment topic? Drop me a line: firstname.lastname@example.org
As you create an asset allocation dashboard, you’ll want to pinpoint a source of income that’s steady and safe. That’s where Robert Rapier comes in.
Robert is our team’s “income guru.” As chief investment strategist of Income Forecaster, Robert’s unconventional investment methods could hand you the retirement you’ve always dreamed of, even in these crazy times. Click here for details.