Diversification – Young Professional & Rising Executive

In my previous post I completed the two part topic of how to diversify your resources among various resources ( Part 1 and Part 2). In this post and the subsequent two. I will touch on how five different individuals can diversify their resources based on their personalities. Specifically I will consider the cases of the following:

• Young Professional
• Rising Executive
• Manager
• Senior Executive
• Retiree

In this post, I will touch on the cases of the Young Professional and that of the Rising Executive.

Young Professional
Characteristics
Age: 30s
Annual Income: GHc 7,200 (Ghana) $50,000 (US
Net Worth: GHc 7,200 (Ghana) $50,000 (US)
Risk tolerance: High
Goals: Upgrade residence and personal property and begin planning for children’s education

Assert Allocation
Cash and cash equivalents………………………….……..5% to 10%
Fixed-income vehicles………………………………….….20% to 30%
Equities……………………………………….………….…..40% to 50%
Hard assets……………………………………...…………...15% to 30%

Financial Profile
You’re feeling optimistic about your life and career prospects. And you have a high tolerance for risk. After all, you reason, you can replace any principal you may lose, because your earnings are bound to spiral upward.
And since you have plenty of time for your investments to pay off, you can ride our any fluctuations in value common to growth stocks.
Moreover, you have little need for income other than your earnings, since your salary amply covers your living expenses.

You do, however want to protect your self against inflation over the long haul. So you invest in vehicles with a solid performance record over time
And you plan to make a down payment on a large house in the near future. So you want to keep a good portion of your holdings liquid.

Investment Strategies
Your portfolio is tilted quite heavily toward common stocks and real estates. The reason: although they fluctuate considerably in value, common stocks are historically, impressive performers over the long term. And they are very liquid.
Meanwhile, your hard assets – specifically your real-estate holdings – are an excellent hedge against inflation.

Rising Executive
Characteristics
Age: 40s
Annual Income: GHc 15,000 (Ghana) $100,000 (US)
Net Worth: GHc 75,000 (Ghana) $500,000 (US)
Risk tolerance: Medium to High
Goals: Educate children, buy a second home, begin planning for retirement and travel

Assert Allocation
Cash and cash equivalents………………………..………..5% to 10%
Fixed-income vehicles…………………………….………..25% to 35%
Equities…………………….………………………………....35% to 45%
Hard assets………………..……………………………….....15% to 30%
Compared with the young professional, the fixed income portion of your portfolio increases slightly while the percentage of common stocks decreases.

Financial Profile
You still have a long time for investment to pay off, but since you are beginning to consider retirement, you take a slightly more conservative posture than you did when you were younger. You still may replace any principal you lose with future earnings, but your time frame is shorter.
You are also less confident of you ability to slash money away, since your expenses are now higher than they were.

You have slightly less need for protection against inflation, because your investment planning period is shorter. But you may need additional income because of high living expenses.
And you still need to keep some holdings liquid. You want money for a sailboat and cash for a down payment on a second home.

Investment Strategies
By allocating less of your portfolio to common stocks and more to fixed – income vehicles, you reduce your overall risk and gain current income. Because you want ready access to your resources, you change the mix of your hard assets from natural resources, say to real estates.

In my next posts I will be considering the cases of the Manager ,the Senior Executive and the Retiree

Subscribe to Financial Intelligence by Email



Email me with any queries or comments.

Investing 101: Portfolio&Diversification - Part 6

It's good to clarify how securities are different from each other, but it's even more important to understand how their different characteristics can work together to accomplish an objective.

The Portfolio
A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset you own - from real items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. For the purpose of this section, I will focus on the most liquid asset types: equities, fixed-income securities and cash and equivalents. An easy way to think of a portfolio is to imagine a pie chart, whose portions each represent a type of vehicle to which you have allocated a certain portion of your whole investment. The asset mix you choose according to your aims and strategy will determine the risk and expected return of your portfolio.

Basic Types of Portfolios
In general, aggressive investment strategies - those that shoot for the highest possible return - are most appropriate for investors who, for the sake of this potential high return, have a high risk tolerance (can stomach wide fluctuations in value) and a longer time horizon. Aggressive portfolios generally have a higher investment in equities.

The conservative investment strategies, which put safety at a high priority, are most appropriate for investors who are risk averse and have a shorter time horizon. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments. To demonstrate the types of allocations that are suitable for these strategies, we'll look at samples of both a conservative and a moderately aggressive portfolio.

Note that the terms cash and the money market refer to any short-term, fixed-income investment. Money in a savings account and a certificate of deposit (CD), which pays a bit higher interest, are examples. The main goal of a conservative portfolio strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation.

The portfolio (picture on the top right) you see would yield a high amount of current income from the bonds and would also yield long-term capital growth potential from the investment in high quality equities.

The moderately aggressive portfolio (picture on the top left) is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund. The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents.

You can further break down the above asset classes into subclasses, which also have different risks and potential returns. For example, an investor might divide the equity portion between large companies, small companies and international firms. The bond portion might be allocated between those that are short-term and long-term, government versus corporate debt, and so forth. More advanced investors might also have some of the alternative assets such as options and futures in the mix. As you can see, the number of possible asset allocations is practically unlimited.

Why Portfolios?
It all centers around diversification. Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio.

There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it's really just the simple practice of "not putting all your eggs in one basket." If you spread your investments across various types of assets and markets, you'll reduce the risk of catastrophic financial losses.

Email me with any queries or comments.