The Big Boomer Theory

The baby boom generation has had a long time to accumulate wealth and income. Now it's time for them to reevaluate their portfolios.

sour, for instance. Financial planners will tell you that 90% of your gains as an investor have nothing to do with mere stock or mutual fund picking, but instead with keeping to a steady balance for the overall composition of your portfolio — asset allocation.
Initially, this was outlined in Part II of our guide. We mapped out the mutual fund universe and how different fund categories exposed investors to varying amounts of risk. For instance, we advised “aggressive investors” to seek out growth funds designed for those looking for bigger gains that can stomach a higher amount of risk and fluctuation in their portfolio. For more “conservative investors,” we recommended growth and income funds that centered on large companies with good prospects going forward, stocks that wouldn’t run up and down as much as smaller companies.

After building a foundation of two or three mutual funds, it’s time to take that sort of portfolio-building exercise a bit further. We’re not suggesting that you completely retool the investment mix you’ve taken this long to mold. Rest assured, stocks — or mutual funds that invest primarily in stocks — are still the bedrock to your portfolio into your 40s and 50s. Historically, they’ve provided returns that outdo almost all other financial vehicles. Over the last 70 years, stocks have averaged annual returns of over 10% since 1926, and over 17% if you narrow your focus onto the current great bull market that took offin 1982. Gaze at figures like that, and it becomes obvious that stocks are the best way to grow wealth.

Once you’ve set up your portfolio’s foundation with one to three mutual funds, you might want to select a few individual stocks to help pep up the return you’re getting. Remember, individual stocks are riskier than funds which hold a large number of stocks that counterbalance one another. A day when Company X’s stock falls apart could cost you a shareholder every dollar that the stock drops. But as a mutual fund holder, you can count on 30 or so other stocks to dampen the blow.

When it comes to picking stocks, there are many styles and schools. Stock picking requires muc
h research and a lot of time reviewing companies. That’s why many experts agree on how to get started: aim first at those companies and industries that you already know something about. That’s a strategy the Williamses have used. Rob’s father worked at a Chrysler auto plant outside of St. Louis for years, and Rob got assembly line work every summer through college there. That close contact helped him better understand the company when Rob chose the automaker’s stock among his first investment shares. “I think their products are solid, and I’ve got to say I’m impressed with the designs of a lot of eheir newer models,” he says. Another favorite is the pharmaceutical company Eli Lilly, based in the family’s hometown of Indianapolis. “They’re real big around here,” says Rob, “so I feel like I know a lot about what’s

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