by Matt Castle

Created on: December 25, 2007

Balancing your portfolio is analogous to any high wire circus act, yet if you make a wrong move, it doesn't afford you the luxury of a quick fall to your death. Instead, it drags on as a reminder of your poor investment decisions. Portfolio management is based on several variables that involves synergy, patience, planning, and most of all, good old fashioned common sense.

The choice of stocks, bonds, and mutual funds is primarily dependent upon your age (i.e. Years until your retirement) and finance knowledge. This in turn, determines your capacity for risk. As a young investor, you will have many years of income potential, so your ability to increase your Return On Investment (ROI) by tolerating more risk is perfectly acceptable. Alternatively, a person nearing retirement wants to preserve and protect the majority of their assets and thus, chooses a more secure form of investments that are secured by a bank, the federal government, or possibly corporate bonds.

Now that the basics are covered, lets walk through them by actually balancing a portfolio.

AVERAGE MIDDLE INCOME FAMILY

An average middle income family is in their mid 40s has an investment portfolio of $100,000. There is no need to withdraw any funds for financial reasons, and 100% of this portfolio is allowed to grow over time for the next 25 years when this family is targeting as their flexible retirement date.

Since retirement is 25 years away, they have the ability to aggressively invest his money. An allocation from 50% to 80% in stocks or mutual funds is easily acceptable. Putting 10% in secured assets like high yield Certificates of Deposits (CDs). Keeping a small amount of cash in a high yield savings account is always a wise idea as an emergency fund as well. When presented as a table, you have the following:

Table 1: A married couple in their 40s.

Investment Type Percent Allocation (%) Dollar Amount ($)
Stocks (or Stock Mutual Funds) 75.0% $75,000.00
Bonds (or Bond Mutual Funds) 15.0% $15,000.00
Cash (High Yield Savings) 10.0% $10,000.00

As you can see from Table 1, this is a portfolio that is moderately aggressive seeking an increase in portfolio value. It offers some security in that 10% of cash is available if absolutely necessary, as well as providing 15% in secured income if the stock market happens to plummet and access to these funds is required.

NEW COLLEGE GRADUATE

A recent college graduate at 25 years of age, and has managed to pull together $10,000 after a few years of working. He has maximized

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