Model Portfolios for Every Investor

Model Portfolios for Every Investor

Investing for the Ages


Stages of Your Life


JR Battaglia


Investing for the Ages and Stages of Your Life

Change is a part of our everyday lives. It is rare to find an individual whose likes, dislikes and habits have not altered throughout his or her lifetime. Just take our eating habits, as an example. Children will turn their noses up at almost any vegetable. And teenagers love a steady stream of McDonald’s hamburgers and other junk foods. But as we grow older, we find that eating a healthier diet is very important to aging gracefully. For most of us, retaining our childhood preferences would almost certainly result in weight and health problems. So we change our habits accordingly.

The same strategy can be applied to our investing health. As we age, and enter different stages of our lives, our financial requirements radically change. Therefore, investments that were perfect for us in our 20’s, when we were just starting our careers, are almost never the same vehicles that are best for us during our retirement years. Bottom line: To ensure that you have the resources you need for every stage of your life, it is imperative that you have an investment plan for each of those periods.

That is why no investment portfolio should be without an allocation strategy.Allocation simply meansthe mix of stocks, bonds and cash in your investment portfolio. A couple of rules of thumb:

  1. Stocks tend to be more volatile than bonds, but have historically experienced higher returns.
  2. The greater your expected return, the more volatility and risk you can expect. The market almost always pays a premium for risk.

Portfolio allocation will and should change as dictated by your personal lifestyle requirements. Here are some examples of typical allocations during different life stages:

Example 1 – single, 25-year old, in first job after college

Typically a renter, this investor would have no major financial responsibilities, with the possible exception of repaying student loans. With 40 years of work and savings in front of him, this person can afford a very aggressive investing strategy. She isn’t looking for additional income at this time

Example 2 – upwardly mobile, single, no children, 35 years old

Generally a first-time homeowner, seeing healthy annual income increases, and beginning their prime earning years. Should concentrate on growth investments.

Example 3 – married couple, dual careers, 35 years old, 2 small children

Probably responsible for a home mortgage and looking to save for college educations for their children. Beginning their prime earning years, they should maximize their growth investments, yet begin to consider some fixed vehicles

Example 4 – married couple, 55 years old, with grown children

Staring retirement in the face, this couple should begin thinking about preservation of capital and additional income needs.

Example 5 – retired couple, 70 years old

A few years into retirement, with a life expectancy of maybe another 12 to 20 years, this couple wants to make sure their money lasts as long as they do. Thus, they need income as well as continued growth in the portfolio.

No matter in which category you fall, you will need to go through the following process to determine your personal best portfolio allocation.

Portfolio allocation is a three-step process

You must decide the following:

I. Your investment goals – What do you hope to achieve by investing?

Growth, or appreciation of value. If this is your goal, it will be best achieved by investing aggressively in equities. Equity returns over the history of the stock market have historically averaged 11% per year. And that is an average from numerous choices of equities. Large-cap stocks tend to be less volatile, but returns – over-time – generally lag the returns you can make by investing in small-cap companies. Likewise, you can also choose among growth stocks, companies whose revenues are expected to grow more than average, and don’t pay much in the way of dividends.

Or you may invest in sector funds, which tend to do very well during certain time periods, but are also more speculative than a fund diversified by many industries. And many investors have made wonderful returns by taking a long-term view on more volatile international stocks. Remember: The higher your expected return, the greater the volatility in your investments.

Income. Investors who are seeking income to supplement their lifestyles should consider less aggressive equities such as mature companies with stable earnings that pay dividends. Additionally, these investors should consider adding fixed income investments such as bills, notes and bonds that provide a steady stream of income to their portfolios.

These range from very conservative, government guaranteed Treasury bills, notes or bonds, or variations thereof, to numerous types of non-guaranteed corporate paper, including commercial paper, notes and bonds. For the more risk-tolerant investors, more speculative higher-yield bonds are available. Fixed income is an excellent way to balance out the volatility of stocks and also helps hedge against stock deflation during times of higher interest rates. One caveat: Please don’t forget to take into account how many years you will need additional income, and plan accordingly.

Capital preservation. For investors who just want to make sure they don’t lose their principal, this is the most conservative of strategies, resulting in a portfolio that is defined as “close to cash”. Your returns won’t be spectacular, but your principal will be intact. An investor may choose certificates of deposits from financial institutions or the government guaranteed investments cited above. Additionally, many investors opt for money market funds. Although not guaranteed, cases are very rare in which investors actually lost any of their principal by investing in money market vehicles.

Note: There are certainly more asset classes in which you can invest, including real estate, art, limited partnerships, commodities and many others, each with their own particular characteristics. You will need to decide if any of those investments meet your personal guidelines.

II. Your time horizon – How long before you need to access your money? Will you need it in 5 years for a downpayment on a home, in 10 years to pay for a child’s education, or in 30 years when you retire? And if the money is needed for retirement, how long do you expect your retirement to be?

Short-term. If your time horizon is less than 5 years, you should keep your investments as close to cash as possible.

Medium-term. If you don’t need your money for at least 5 to 10 years, you can afford to look at investments such as a mix of equities, fixed income and cash – perhaps a 50%, 20% and 10% combination. This will be more volatile, but gives you the potential for much higher returns.

Long-term. The longer you hold an investment, the better off you’ll probably be. Although you will see bear and bull markets in the long run, historical statistics tell us that staying put through the lean times will result in a positive overall return for the market and your investments. In the 72-year period from 1926 to 1997, the S&P 500 had positive annual returns 52 times. A long time horizon lets you take more risk by investing in a heavier equity-weighted portfolio – perhaps as much as 80% -- and thus increases your return potential.

III. Your risk tolerance. Risk doesn’t mean that you are going to lose your investment. It simply means the amount that your investment’s value will fluctuate over time. Risky investments rise and fall more steeply than safer investments. The relationship between risk and return is direct – as your potential return increases, so does your level of risk. Remember that diversification among assets and categories within those asset classes drastically reduces your risk.

Low – If you would not be able to tolerate a short-term decline in your assets of 10% or less, equities should make up no more than 25% to 30% of your portfolio.

Medium – If your risk tolerance is a little higher, and you could stand to watch your portfolio decline by 20%, keep no more than 50% of your portfolio in equities.

High – If you are more of a risk-taker and can bear a 30% to 40% short-term decline in stock prices, your portfolio can afford a 70% equity allocation.

Now that you have considered all of the above possibilities, it is time to develop your personal portfolio allocation. It will just take a few minutes to take the Portfolio Allocation Quiz on the following page. Circle the numbers that best describe you, tally those numbers, then compare them to the final scoring evaluation following the quiz. That will give you a good start in personalizing your own portfolio strategy.

I’ll leave you with just a few reminders:

An investment plan is crucial to your long-term financial well-being

Diversification among asset classes and investments within those classes is extremely important

Err on the side of conservatism.

Start early and be disciplined in contributing regularly to your investment program.

I wish you the best of fortune in your investing future.

Portfolio Allocation Quiz

1. What is your age?

25 35 45 55 65 75

1 2 3 4 5 6

2. What is your risk tolerance?

High Medium Low

1 2 3

3. What are your investment goals?

Growth Growth & Income Income Preservation of capital

1 2 3 4

4. How much cash will you need within the next ten years?

<$10,000 $10,000-$30,000 $30,000-$60,000 >$70,000

1 2 3 4

5. What return do you need on your investments to meet your goals?

None Low (1%-5%) Medium (6%-10%) High (>11%)

1 2 3 4


Score / Strategy / % Stocks / % World / % fixed Income / % Cash
5 or less / Most aggressive / 70 / 20 / 5 / 5
6 – 11 / Aggressive / 60 / 20 / 15 / 5
12-15 / Balanced / 45 / 15 / 35 / 5
16-19 / Conservative / 30 / 10 / 50 / 10
20 or more / Most Conservative / 30 / 0 / 50 / 20
Leading Sector Allocation --- would represent 20% of the Stock Percentage.
Example: For Aggressive Model ---
% allocated for stocks 60% = $60,000
20% of 60,000 = $12,000.00 allocated for Leading Stock Sector Model.