Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 48)

Working Toward a Goal:

Asset Allocation

by

Charles Lamson

Portfolio Components

Asset allocation is about spreading risk over different asset classes to even out the peaks and valleys. Most financial professionals feel that your portfolio should consist of a mix of bonds and stocks. Some would add cash to the mix but most would not.

The obvious questions here are

• Which stocks in what portion?
• Which bonds in what portion?

The answer, like most answers to investing questions, is: "It depends." It depends on your age and risk tolerance. A young, aggressive investor will look at these questions quite differently than a middle-aged conservative investor.

It might be helpful to look at the problem from an age/risk perspective. Again, we are assuming that the investment goal is funding retirement by age 65.

JUST A MINUTE The suggested allocations do not include a cash component. Many financial professionals do include cash. This is a personal preference. Do what is most comfortable for you.

We will look at age groups starting with the youngest and working forward. Each age group will have three levels of risk tolerance: conservative, moderate, and aggressive with suggestions for each. There is no official asset allocation formula, so consider these suggestions as just that: a starting point for your own thinking.

Age 20-30

It may be hard to think seriously about retirement at this age, but you could not pick a better time to start. Not only will you almost certainly build a substantial nest egg, but you will get in the habit of investing that will serve you well the rest of your life.

Conservative Portfolio

A conservative approach at this age suggests a stock/bond mix for long-term growth and stability. An additional consideration is that there will not be a lot of money invested in this period, so mutual funds make more sense than individual issues.

Stocks	S&P 500 index fund	80 percent
Bonds	Long-term bond index fund	20 percent

Moderate Portfolio

A more aggressive approach might stay with a stock/bond mix, but change the portions somewhat.

Stocks	Large-cap value fund	25 percent
	Large-cap growth fund	50 percent
	Foreign stocks fund	15 percent
Bonds	Long-term bond index fund	10 percent

Aggressive Portfolio

Our young lion wants to roar; so we drop bonds from the mix completely.

Stocks	Small-cap growth fund	40 percent
	Small-cap value fund	30 percent
	Foreign stocks fund	30 percent

Age 30-40

For many of us this is the age in which we begin to settle down and start thinking about our future. Retirement is still a long way off but not so far that it is off our radar screen altogether.

Conservative Portfolio

Our conservative investor can stand put or if she believes the stock market is looking shakey, move more assets into long-term bonds.

Stocks	S&P 500 index fund	70 percent
Bonds	Long-term bond index fund	30 percent

Moderate Portfolio

Our moderate friend is happy with the mix, but just to be on the safe side, ups the percentage of bonds.

Stocks	Large-cap value fund	25 percent
	Large-cap growth fund	40 percent
	Foreign stocks fund	15 percent
Bonds	Long-term bond index fund	20 percent

Aggressive Portfolio

Our young lion still wants to roar but begins to understand the danger of staying heavily invested in one area (small-cap stocks).

Stocks	Small-cap growth fund	40 percent
	Large-cap growth fund	40 percent
	Foreign stocks fund	20 percent

Age 40-50

As we enter the years of our peak earning capacity, retirement begins to seem like a not-to-distant hill looming larger and larger.

Conservative Portfolio

Our conservative investor hears retirement calling more loudly than most. She grows more nervous about stocks and moves more assets into long-term bonds.

Stocks	S&P 500 index fund	60 percent
Bonds	Long-term bond index fund	40 percent

Moderate Portfolio

Our moderate friend is becoming nervous about the stock/bond ratio and moves to up the bond component at the expense of the large-cap growth fund.

Stocks	Large-cap value fund	25 percent
	Large-cap growth fund	30 percent
	Foreign stocks fund	15 percent
Bonds	Long-term bond index fund	30 percent

Aggressive Portfolio

Our young lion realizes he is not a young lion anymore, but wants to stay heavily invested in stocks as is prudent. His move into bonds discards the fund notion and buys bonds directly for a better yield even though the risk is higher.

Stocks	Small-cap growth fund	20 percent
	Large-cap growth fund	40 percent
	Foreign stocks fund	20 percent
Bonds	Long-term bond index fund	20 percent

Age 50-60

These are the years we set the stage for requirement, getting our ducks in a row and guarding against any fourth quarter surprises by the market.

Conservative Portfolio

Our conservative investor is focusing on calculating what her living expenses will be and how much she will have coming in between Social Security and her retirement. The focus is shifting to income and capital preservation. She will stay in equities but will move out of an index fund and into solid income stocks like utilities. At the same time, she will slowly shift out of a bond fund and into individual bonds (10 years or more) that begin maturing at retirement. At the end of this period, her portfolio looks like this:

Stocks	High-quality income stocks	50 percent
Bonds	Long-term bonds	50 percent

Moderate Portfolio

Our moderate friend also begins moving toward income and away from growth, but not completely. Foreign stocks look too unstable, so they get dropped. He also begins shifting away from a bond index fund and into high-quality individual bonds.

Stocks	Large-cap value fund	40 percent
	Large-cap growth fund	20 percent
Bonds	Long-term bonds	40 percent

Age 60-??

Even though we may not retire until 65 (and many people are continuing to work after 65), we are in a retirement mode at this point with our investments.

Conservative Portfolio

Our conservative investor continues her shift to current income and capital preservation. However, she is aware that being too conservative may cause her to outlive her money.

Stocks	High quality income stocks	30 percent
Bonds	Long-term bonds	40 percent
	Bond index fund	30 percent

  

Moderate Portfolio

Our moderate friend begins the shift to a heavier emphasis on income and away from growth.

Stocks	Large-cap value fund	20 percent
	High-quality income stocks	40 percent
Bonds	Long-term bonds	40 percent

Aggressive Portfolio

Our now not-so-agile young lion finds golf more interesting than investing but still keeps his toe in the water.

Stocks	Large-cap value fund	30 percent
Bonds	Long term bonds	70 percent

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 292-297*

END

JUST A MINUTE

The suggested allocations do not include a cash component. Many financial professionals do include cash. This is a personal preference. Do what is most comfortable for you.

Stocks

S&P 500

index

fund

80 percent

Bonds

Long-term

bond index

fund

20 percent

Stocks

Large-cap value fund

25 percent

Large-cap growth fund

50 percent

Foreign stocks fund

15 percent

Bonds

Long-term bond index fund

10 percent

Stocks

Small-cap growth fund

40 percent

Small-cap value fund

30 percent

Foreign stocks fund

30 percent

Stocks

S&P 500 index fund

70 percent

Bonds

Long-term bond index fund

30 percent

Stocks

Large-cap value fund

25 percent

Large-cap growth fund

40 percent

Foreign stocks fund

15 percent

Bonds

Long-term bond index fund

20 percent

Stocks

Small-cap growth fund

40 percent

Large-cap growth fund

40 percent

Foreign stocks fund

20 percent

Stocks

S&P 500 index fund

60 percent

Bonds

Long-term bond index fund

40 percent

Stocks

Large-cap value fund

25 percent

Large-cap growth fund

30 percent

Foreign stocks fund

15 percent

Bonds

Long-term bond index fund

30 percent

Stocks

Small-cap growth fund

20 percent

Large-cap growth fund

40 percent

Foreign stocks fund

20 percent

Bonds

Long-term bond index fund

20 percent

Stocks

High-quality income stocks

50 percent

Bonds

Long-term bonds

50 percent

Stocks

Large-cap value fund

40 percent

Large-cap growth fund

20 percent

Bonds

Long-term bonds

40 percent

Stocks

High quality income stocks

30 percent

Bonds

Long-term bonds

40 percent

Bond index fund

30 percent

Stocks

Large-cap value fund

20 percent

High-quality income stocks

40 percent

Bonds

Long-term bonds

40 percent

Stocks

Large-cap value fund

30 percent

Bonds

Long term bonds

70 percent

Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 47)

Picking a Stock (part B)

by

Charles Lamson

Research Without the Internet

If you chose not to use the Internet, or simply do not have access to it, there are other ways to research companies for investment.

One of the best tools available is called the Value Line Investment Survey. Value Line publishes this comprehensive research tool: you can usually find a copy at your local library.

The Value Line staff digests tons of information about publicly traded companies and presents it on a single page for easy reference. All the numbers and ratios we will discuss shortly are contained in this summary, as well as important information that describes the business.

The Value Line service is expensive, but if you are going to be an active trader and do not want to use Internet resources, this is the tool you need.

JUST A MINUTE You will find helpful information about investing at the public library in the reference section.

Tons of Information

There is even more information available for free from individual companies. If you find a company you are interested in knowing more bout, the next step is to gather some additional information.

If you are using Value Line, this step is still more important and, even if you are using the Internet, follow this step for a couple of companies just to get the feel of what is available. You may find that digesting the traditional printed word is easier than reading off your computer screen or printing out everything you are interested in.

Companies will send you annual reports along with other documents they are required to produce for investors. You do not need these to buy the company's stock in the open market, but they contain a wealth of information that will be available in your research. If you do not know how to reach the company, call the exchange the stock is listed on for the number.

You can also go to the Internet site; many will let you order annual and quarterly reports online.

TIME SAVER Companies are eager to share information with you. For one thing, they are rquired to make most of the information you need available to the public. You do not need to own the stock before requesting this information.

The Wall Street Journal offers a free service that allows you to order annual reports on selected companies. If you look through their listings, you will see that some stocks have a clover-shaped character next to the listing.

You can order annual reports on these companies using a 1-800 number. The Journal claims the reports will be shipped the next working day.

The Annual Report

The annual report is one of several documents the company is required to publish and make available to the public. It is the one that is most often adorned with glossy, color photographs of happy customers, happy workers, happy management, and happy machinery. It projects the company as one big, happy family.

The really important part of the annual report may tell another story, but up front the management will put on their Sunday best to impress current and potential shareholders.

While the up-front material may be forgiven for being a shameless sales job, the financial information inside must adhere to rigid financial and accounting standards. The statements must be audited and prepared by an accredited accounting firm that will testify to their veracity and note any irregularities in accounting or management procedures.

*ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 272-274*

END

JUST A MINUTE

You will find helpful information about investing at the public library in the reference section.

TIME SAVER

Companies are eager to share information with you. For one thing, they are rquired to make most of the information you need available to the public. You do not need to own the stock before requesting this information.

Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 46)

Picking a Stock (part A)

by

Charles Lamson

Picking Stocks to Evaluate

Before you can evaluate a stock, you need to narrow your choices down from 10,000 or so available stocks. There is no shortage of information on companies; in fact, you may find there is too much.

TIME SAVER You can find helpful stock screens at many locations on the Internet. One of the best is morningstar.com.

The best and fastest way to pick stocks for evaluation is to use a stock-screening service available on the Internet. These tools allow you to set some parameters and narrow the field down to only those stocks that match your "screen."

Many of these services have preset screens that are already set up for you. Others allow you to build your own screens. For example, you can ask the screen to look for companies that have had revenue growth in excess of 15 percent for the past three years and have a market capitalization less than $750 million.

This might give you some potential growth stocks to look at. Morningstar.com has a screening function that will help you focus on the type of company you are looking for and, if you are using morningstar.com categories, allow you to compare this stock to its peers.

There is another screening method that is not nearly so high-tech, but can be just as successful. In his book Alpha Teach Yourself Investing in 24 Hours, Ken Little calls it the "keeping your eyes open" method of screening. As an example, Little relays the following story on page 271:

Years ago when the financial services industry was going through deregulation, a couple of hotshot brokers were trying to figure out how to make a lot of money by picking the winners in a deregulated market.

Meanwhile, a retired schoolteacher amassed a small fortune (for her) by doing the same thing. The difference? While the hotshot brokers were pouring over research reports and annual reports, the retired schoolteacher noticed that deregulation had permitted the placement of automatic teller machines at sites off of the bank's property. She concluded that this was sure to be a popular trend, so she invested in companies that made the ATMs.

She correctly saw a change in the way cash was distributed by banks and capitalized on it by not worrying about which banks were going to do well in deregulation, but focusing on a machine they would all want and need.

The point is, she kept her eyes open. I am not suggesting you try to figure out what the next ATM phenomenon will be. However, vou can make some educated guesses about which stocks to research using the same method.

JUST A MINUTE Some of the best investment tips come from your own common sense. Keep your eyes and mind open to new possibilities.

Here are some screens to consider:

• Invest in what you know
• Invest in what you buy
• Invest in what a lot of people buy

Invest in What You Know

Are there changes and innovations at your workplace that may indicate potential new markets or other group opportunities? Maybe your competitors are the ones out front. What about suppliers you work with or observe at your work?

Invest in What You Buy

Apply the same principals as when investing in what you know. What are you buying now that you did not buy yesterday? Items and services that simplify your life are going to be increasingly important.

PROCEED WITH CAUTION Consumers drive our economy. Invest in products and services they want and need, and you will seldom go wrong.

Invest in What a Lot of People Buy 

Maybe you prefer Pepsi over Coke, but either way, hundreds of millions of people buy both each day. On the other hand, how many supercomputers are sold each day? Not many.

The point is that products used by the masses are usually better investments than companies making a very specific product with a limited market. In our example above, the schoolteacher picked a product that would penetrate 100 percent of its market.

Whether it is consumables or vital infrastructure products, market leaders and up-and-comers are worthy of your consideration.

*ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 269-272*

END

TIME SAVER

You can find helpful stock screens at many locations on the Internet. One of the best is morningstar.com.

JUST A MINUTE

Some of the best investment tips come from your own common sense. Keep your eyes and mind open to new possibilities.

PROCEED WITH CAUTION

Consumers drive our economy. Invest in products and services they want and need, and you will seldom go wrong.