An investment portfolio should be a well-constructed gathering of stocks and bonds that can be expected to perform synergistically under various market and economic conditions. Random purchases of stock, without regard to their cyclical or counter-cyclical historical performance, will leave you with a portfolio that performs well only part of the time and loses money at other times. This hampers the overall growth of your portfolio, because its performance will be two steps forward and two steps back. Balancing your portfolio between cyclicals and counter-cyclicals will provide two steps forward and one step back performance, which will allow the portfolio to grow over time.
Decide what you want your portfolio to accomplish: income (taxable or tax-free), long-term growth, safety, aggressive price appreciation or cause-oriented such as green or politically specific.
Divide your cash intended for investment into three, five or 10 equal amounts, depending on the total amount you will be investing. This is so you can plan for asset allocation, which provides a measure of safety and the potential for price appreciation by diversifying your portfolio to take advantage of the different behaviors of investment sectors. Invest each portion of money in a different sector, balancing between cyclical and counter-cyclical stocks and bonds.
Research the performance of various industry groups during boom times, recessions, high interest rate and low interest rate periods. During boom times, cyclical industries that produce greater revenues are durable goods manufacturers, retail, construction, finance, travel, and other industries that depend on consumer confidence. During recessions, the defensive or counter-cyclical industries are food, beverage, tobacco, technology, outplacement, utilities and other industries that produce consumer necessities.
Determine how much you should have invested in cash equivalents and bonds. If you are under 40 years old, your portfolio should be weighted 50 to 80 percent in stocks. As you get older, you should weight your portfolio as high as 80 percent in cash equivalents and bonds.
Consider purchasing mutual funds or exchange traded funds (ETF) for easier diversification if your investable cash is $50,000 or less. It is important that you check the portfolio contents of these packaged investment products and avoid purchasing overlapping investment sectors.
- A reputable broker or certified financial planner will be able to educate you and answer your questions, in addition to constructing a portfolio for you. However, learn as much as you can about investing so you can make informed decisions about the quality of your adviser and the wisdom of his recommendations.
- Never ignore your portfolio. Monitor its performance daily and expect to sell some of your investments and re-allocate your sector mix at least once every year. Try to anticipate the effects of crisis situations and avoid selling out of everything in panic over a market drop. Always use hedging tools such as orders to sell at certain price levels (trailing stops) or buy puts, which move opposite to a falling market, to protect your portfolio from losing money.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.