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Being Realistic

When it comes to investing one of the best things you can be is realistic.  An investor needs to be realistic about their experience, goals, and  expectations.   Firstly if you do not have adequate investment experience there is help to be obtained.  Many books, videos, and seminars are made readily available to assist.  Most, if not all brokerage firms offer some form of investor education.  It will continue to pay dividends, no pun intended to invest in your individual knowledge about investing and investing products.  The reason that goals and expectations were listed separately is because they take on different levels of importance for each investor, and must be considered separately.  Investing goals can include things such as: saving for education, retirement, or investing extra savings.  An investment expectation is what you expect the results of the investing to be.  For instance, you save/invest $200 per month for 2 years ($4,800), with the expectation that at the end of two years it will grow to at least $5,500.  The expectation that the funds invested over two years could reach $5,500 is realistic.  What is not realistic is for an investor to decide to invest $10,000 with the expectation that it will grow to $100,000 in one month’s time.

Taking On Risk

Investing is sort of like running track, in the sense that the person who puts in the most can expect above average returns.  Three things that help to increase returns for investments are time, amount, and risk.  Over longer period of times investments have more room to grow and rebound from any fluctuations in the market.  Amount is important because when you invest more you increase the chances of getting returns.  More invested does not mean all though, you should never invest more at a given time then you could comfortably afford to lose.  Risk is one of the greatest considerations when factoring in returns, because the more risk you take on the greater the potential returns that exist.   Stocks have historically had the greatest risk and highest returns among the three major asset categories.*  Included in the three major asset categories are stocks, bonds, and cash.  People who invest in stock would naturally expect a higher return due to the fact that they have taken on more risk.  Whereas someone who has invested in cash would be willing to accept a lower return for the knowledge that their funds typically do not experience extreme fluctuations in value like stock or bond investments.

Appropriate Asset Allocation

Asset allocation involves finding the right mix of stocks, bonds, and cash equivalents for your portfolio.  As stated earlier in the Taking On Risk section, time and risk will play big parts in determining the right mix.  Typically younger investors who are further away from retirement or people without an immediate need for the funds will tend to have allocations with robust stock components.  Older investors, people close to retirement, and those with a near term need for funds will tend to have large bond and cash components in their asset allocation.  On the low end of the asset allocation spectrum are your conservative investors, and on the other end are the more aggressively inclined investors.  Each asset allocation profile has its on return profile over a period of time; say a year or five year time frame.  Below will be a sample suggested allocation breakdown that highlights returns over a 10 year time period (for illustrative purposes only, average returns could be different now, and appropriate mix is based on many variables).  Suggested Allocation Breakdowns *1
  Suggested Allocation Breakdowns *1
Suggested Allocation Breakdowns *1

Aggressive



   20% Large-Cap Stocks

   20% Mid-Cap Stocks

   20% Small-Cap Stocks

   20% International Stocks

   10% Emerging Markets Stocks

   10% Intermediate Bonds

   0% Short-Term Bonds

Moderate



   20% Large-Cap Stocks

   20% Mid-Cap Stocks

   10% Small-Cap Stocks

   15% International Stocks

   5% Emerging Markets Stocks

   30% Intermediate Bonds

   0% Short-Term Bonds

Conservative



   25% Large-Cap Stocks

   10% Mid-Cap Stocks

   10% Small-Cap Stocks

   5% International Stocks

   0% Emerging Markets Stocks

   40% Intermediate Bonds

   10% Short-Term Bonds

Aggressive Portfolio Return

YTD:

2.7%

1 yr:

9.6%

5 yrs:

11.6%

10 yrs:

8.2%

Moderate Portfolio Return

YTD:

3.0%

1 yr:

8.5%

5 yrs:

10.1%

10 yrs:

7.4%

Conservative Portfolio Return

YTD:

3.4%

1 yr:

7.8%

5 yrs:

8.9%

10 yrs:

6.4%

 

* http://www.sec.gov/investor/pubs/assetallocation.htm

*1 http://www.aaii.com/asset-allocation