Dear Mr. or Ms. Overachiever, you with the tower of resolutions so high you’ll probably never get to half of them in the next 365 days. If nothing else, be sure to squeeze one thing into the beginning of the list: look over your investments and make a plan for the year.
Investment professionals have a term for the process: asset allocation. It’s an exercise meant to help you snare the highest possible return at the lowest possible risk. It’s a relatively simple task despite the rather imposing name (see "The Big Boomer Theory," November 1997). Step one, you see how much money you have to invest or have already invested. Next, you decide how to divvy that sum up into stocks or bonds and how much to keep in cash should the market look a little shaky, or should opportunities arise around the corner. To make your job easier, we’ve gathered three of the best minds in the investing business to offer up suggestions: Randall Eley of the Edgar Lomax Co. in Springfield, Virginia; Mark D. Lay of Pittsburgh-based MDL Capital Management; and John Rogers of Chicago-based Ariel Capital Management.
Before we push onward, it’s a good idea to outline the function of each of the three blocks-stocks, bonds and cash-in your portfolio. Investment professionals say stocks are for growth. Despite the ups and downs of the market, stocks have historically brought investors a handsome return over time, an average of over 10% according to Ibbotson Associates, a Chicago investment consulting firm.
Bonds, meanwhile, steady a portfolio. They pay investors interest payments, steady, regular income-about 5% annually under current conditions-while protecting your principal, provided you cash them in at maturity. That becomes important in times when the stock market goes through ups and downs.
Think of cash as your hunting stash, money you’ll use to seize upon opportunities in the stock market, or savings you want to keep out of a turbulent market until things calm down a bit. It’s important, however, to distinguish cash on hand for investing from the emergency fund we’ve recommended in the past. Remember, financial planners say it’s best to stow away three to six months’ salary in a money market mutual fund, just as a cushion should you come across rough times. Cash in your stock portfolio is actually money beyond that safety fund. Instead it’s a sum you’ve earmarked for the stock market, but haven’t yet put to work.
Our experts have come up with markedly different approaches to the year ahead. A mistake? No. We expressly chose pros who specialized in different facets of investing who could give you a wide range of investment ideas to choose from. For instance, Randall Eley, who manages money for institutional clients such as Shell Oil and the city of Baltimore, sticks to large capitalization stocks, the corporations with big household names we stumble across daily. Mark Lay is a seasoned bond expert. His firm invests