Marc Cuniberti: Building a portfolio
There are many ways investors and financial advisors build investment portfolios. From drawing on a “hunch” to the most technical mathematical analysis known to man, the way people select what stocks to buy literally run the proverbial gamut.
There are highly sophisticated methodologies and computer algorithms to the outright bizarre method of real leaves and astrology.
I once had a client who shook dice-like wooden cubes to tell her whether a selection I had made should be bought or sold.
There are more common approaches of course. Diversifying between a number of asset classes or holding a large quantities of assets are common approaches.
Buying a handful of individual stocks might be another. A common method by some advisors is to stack up a bunch of mutual funds in a wide variety of different classifications and then perhaps adding in some fixed income type of securities like bonds and preferred stocks.
Then there is a whole slew of investors that just buy what is in the news, or on TV, or that listen to stories over the office water cooler or take the latest hot stock tips from well-meaning friends and relatives.
Some buy stocks scheduled to pay dividends and some live off the income of a bond portfolio. I’ve seen others who just keep whatever it is they may have inherited from mom or dad.
Whatever the method, one thing holds true. None of them are foolproof or guaranteed to succeed.
Sure there are some strategies that may perform better than tossing wooden dice but don’t bet the farm on that conclusion either. The Wall Street Journal holds a dartboard throwing contest and compares the results of stock picking that way to professional money managers. The results are not as conclusive as you might think thus proving that successful stock picking is an elusive talent to even the most experienced of professionals.
In conclusion, whether you select your own stocks or hire a professional money manager to do it for you, make sure you monitor the portfolios performance in both down and up markets and realize portfolios will not always perform as expected due to sheer complexity of the markets and the dynamics that drive them.
The prudent direction is no matter your portfolio is doing, make sure the price swings, otherwise known as volatility, is within your risk tolerance level.
In other words, if the movement is making you catch your breath every so often, your allocation method might not be suitable for your particular tolerance level and mindset.
Believe me, I’ve seen them all and I can honestly say not one method is foolproof.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. He is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at 530-559-1214, or SMC Wealth Management, 164 Maple St #1, Auburn. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.
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