by Keith Fitz-Gerald | July 23, 2012 12:47 pm
The traditional ways of saving money aren’t enough anymore. Over the past few years, it’s more than likely that your portfolio took a huge hit, your house lost value and all the dollars you have tucked away for a rainy day lost value with each passing day. Whether you realize it or not, you’re getting burned. So it’s time to look at investing in a completely new way.
The old asset allocation models your stockbroker once promised would never lose money (how did that work out for you by the way?) are the way of the past, the “growth stocks” aren’t growing and the “value stocks” have lost their value. You need a new plan, and we have it for you.
Not everybody wants to skydive. Some people are content with low-risk, low-return investments, while others love the thrill of risking it all for the chance of making their money triple.
It’s easy to be seduced by visions of high returns, but take a little time to think about your risk tolerance. First, think about when you’ll need the money you’re investing, then think about how comfortable you are with risk. Finally, make sure your broker knows exactly what your risk tolerance is.
One way to get a good gauge on your risk tolerance is to use one of the risk tolerance tools that are available online. A simple Google search should turn up dozens of results.
The major brokerage firms spend a lot of money on television ads telling you why they are the best, how they have the best tools and how they are the ones who will look out for you.
If that were true, the financial crisis we’re all recovering from wouldn’t have happened.
So, when you pick your broker, take everything they say with a grain of salt. Try to find someone you trust — someone you feel comfortable with and someone who isn’t going to push you into any investment(s) that you don’t feel comfortable with.
When scouting brokers, never gloss over an asterisk — especially when it’s placed next to an advertised deal. The fine print it refers to could mean that you’re signing up for higher fees than you realize.
Don’t be afraid to call the brokerage up and ask every question you have. Sometimes brokers talk like doctors or computer repairmen — they have their own language they strategically use to intimidate their customers. Keep them in check by writing down every question you have and checking them off only if you understand their answer completely.
We’re at the most important part of the process: Figuring out what stocks to invest in.
But first, we need to dispel a myth:
For decades, we’ve heard over and over how international investments should comprise no more than 5% or 10% of our portfolio’s total value — any more than that is foolhardy and risky.
Well, I’m here to tell you that advice is complete bunk!
As we learned from the financial crisis, we’re living in a global economy. The best investments are no longer always in the United States. So stepping outside that box is necessary to capture your desired returns.
With that in mind, let’s determine how much of your portfolio each element within it should account for, and study how you can position your holdings to capitalize on this forward-looking strategy.
Base Builders are generally dividend and income investments and should account for as much as 50% of your holdings. This is the part of your portfolio that provides stability and balance through all market conditions. Among the holdings in this part of your portfolio will be investments that many folks view as “boring.”
By adopting such a view, however, those investors miss two very key points. First, many of the investments in this category protect you in bearish markets and can soar 20% or more in good markets. Secondly, many of these will pay dividends — a much bigger deal than most investors realize.
If you go back more than 100 years — all the way back to 1871, in fact — you might be surprised to discover that 97% of total stock market returns were due to dividends. So it makes sense that the base of your pyramid — the foundation of your portfolio — would be made up of dividend-paying stocks and other income-producing investments.
Global Growth should account for as much as 40% of your holdings. These investments occupy the central portion of your portfolio, and include “Glocal” stocks (large U.S. companies with global operations), as well as investments in the hyper-bullish energy and commodities sectors.
Those global giants give investors a piece of the bigger returns being generated by such economies as China, India and Latin America, while still benefiting from the safer U.S. reporting and regulatory environment.
The Rocket Riders are hyper-growth investments that should occupy up to 10% of your holdings. Over the long haul, these investments will generate massive profits, but in the interim you can expect them to take you on one hell of a ride.
Ultra-high-growth investments include direct emerging-market investments, newly public shares, alluring-but-risky turnaround plays and other such opportunities that are usually accompanied by equal helpings of volatility and risk.
By combining the profit potential of these mega-growth “Rocket-Rider” investments with the balance of the “Global-Growth” holdings and the high payouts of the “Base-Builder” plays, you’ll always be ahead of the curve as new investment trends develop.
Over time, you’ll find this investment pyramid to be an easy-to-use, highly profitable tool.
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