• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 6. Foolish Risks > Picking Portfolios

Picking Portfolios

Of course, the investor must not only pick the stocks for the portfolio, he or she must also determine how much of the portfolio should be in stocks. Your financial goals should help determine this asset allocation. It is difficult to know whether the portfolio you pick will give you a chance to meet your financial goals. Should you have 15% of your assets in small cap stocks or 20%? How much should be allocated to international securities? What is the asset allocation that gives you the best chance to reach your financial goals? These are hard questions and are a problem for investors trying to match their portfolio characteristics with their financial goals. Indeed, investors don't know the future ramifications of their portfolio choice.

For example, consider that an investor invests his retirement assets in a portfolio of 50% stocks and 50% bonds. At retirement, he can expect to earn $24,000 per year in income from the money. However, on the downside, this allocation might also mean that there is a 5% chance that he will only receive $15,000 per year. There is also a 5% chance that he might receive $50,000 per year. Taking risk means uncertainty for the future! These potential income figures provide the investor with the possible outcomes of using the 50/50 allocation. As an alternative, the investor could invest 70% in stocks and 30% in bonds. This riskier allocation provides an expectation of $30,000 per year in income with the potential (5% chance) of actually getting $10,000 or $60,000. As you would expect of a riskier allocation, the 70/30 portfolio allows you to expect more wealth in the future. However, additional risk also means that there is a greater chance of ending up with extraordinarily low wealth or high wealth.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint