- The Washington Times - Wednesday, November 2, 2005

When the future is uncertain, as it always is on Wall Street, the best defense for mutual fund investors is a broadly diversified portfolio. But sometimes people confuse the idea of diversity with owning many different funds, and they wind up with a hodgepodge of investments that don’t perform in harmony with one another.

The key to protecting the wealth you’ve accumulated over the years is smart asset allocation — ensuring your whole nest egg isn’t tied up in one basket. A well-conceived plan can make your portfolio more efficient and give you peace of mind, even when the market doesn’t go your way.

Think of the care we take in mapping out our career paths. We seek advanced degrees; we plot our moves up the chain of command and have a vision of where we want to go. But when it comes to investing, we often end up shooting from the hip, making decisions based on tips we see in magazines or on TV, or suggestions from co-workers and friends, said Richard A. Ferri, author of “All About Asset Allocation.”

If this describes the way you’ve accumulated your assets, your portfolio is not working as hard as it could.

“Right now, stop everything, develop a plan. A long-term plan that will work for you for the rest of your life,” Mr. Ferri said. “This is about reaching financial security. And that doesn’t mean getting rich. The right asset mix can help you achieve financial security, not only for yourself, but maybe for your heirs.”

If you allocate your assets wisely, you’ll be exposed to all parts of the market and won’t be left scrambling after the herd when one area gets attractive. Your portfolio already would hold real estate, commodities and international stocks, at levels appropriate for your risk tolerance. When these areas do well, all you would have to do is collect your profits when you rebalance.

In short, asset allocation “is the second-most-important decision investors make,” said Robert R. Johnson, managing director of the Chartered Financial Analyst program division at the CFA Institute, a nonprofit group that certifies financial analysts. “The most important decision is to invest in the first place.”

It’s easy to get distracted by the complexities of securities selection — deciding which stocks, bonds and mutual funds to buy. There are so many available, and no shortage of people eager to sell them to you. But it’s a mistake to buy the ingredients of your portfolio before you’ve figured out your recipe for investing success. And ultimately, knowing what you need, and why you need it, will make buying the actual securities easier.

Several factors will go into your asset allocation decision, including your age, income level, total wealth and your tolerance for risk, which is a very personal decision. Another issue to consider is liquidity; if you need ready access to your invested funds, you could wind up with lower returns.

When developing your plan, avoid the trap of looking at the segments of your portfolio in isolation. All the things that make up your total net worth should be considered as part of an integrated whole, including your home (which really is an investment in real estate), any defined contribution plan you participate in at work, and your future earnings power. You may be very comfortable investing in the industry you work in because you understand it so well, but you should be wary of compounding your exposure to risk.

The most basic asset allocation involves distributing your risk among stocks and bonds, but to have a truly diversified portfolio, you’ll need exposure to more asset classes than these two, such as real estate and other alternative investments loosely correlated to the rest of the market.




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