Financial Makeover: Regaining Confidence
June 17, 2002 -- Anne has lost confidence in her investing abilities over the past year because she lost a significant portion of her retirement account. She needs to rebuild her confidence so she can make sound investment decisions for her retirement.
The good news is that she is still young and has a new job that looks promising for building up her retirement account. She should continue to max out her contributions every year to enjoy the full effect of the matching incentive her company offers.
If she still has additional funds to contribute to her retirement account, she should by all means do so. She should think about establishing a Roth IRA for these additional funds.
Moderation Is Key
Anne's new career will provide her with discretionary income that should be invested. To do this, she should develop a long-term vision of her future.
She probably was heavily weighted in large-cap growth stocks at the top of the bull market, and is now hearing all about value investing. Like most things in life moderation, is key. She needs a diversified portfolio that will preserve her future wealth, as well as grow it.
Anne is going to need a balanced portfolio of about 50 percent U.S. Equities, 40 percent fixed income, and 10 percent international equities. She can spread out her U.S. equities risk by using good no-load mutual funds. Here are some suggestions to get started:
Suggested Asset Allocation
CategoryMutual FundSymbolAllocation
Large/Mid-Cap Oakmark Equity & Income OAKBX 20%
Small-Cap Value Third Avenue Value TAVFX 15%
Small-Cap Growth Baron Small Cap BSCFX 15%
International Equity Tweedy, Browne Global Value TBGVX 10%
Fixed Income Dodge & Cox Income DODIX 40%
Morningstar has a user-friendly system for researching all of your mutual fund investments. Often the public library will have its services on reference. If not, go to its Web site, www.morningstar.com, and use the free mutual fund analysis tools.
Pick solid, long-term performing, no-load mutual funds and implement investment plans. Anne can keep up with her mutual funds' performance using these new tools, and customize her portfolio to her needs as she becomes a seasoned investor. As Anne gets closer to retirement, she should gradually increase the fixed-income proportion of her portfolio to around 60 percent to secure her wealth before retirement.
Getting It Back
Anne, you have lost your confidence in investing like many others over the past two years. You are not alone. Conservative investors were led to believe that equities had little risk of losing value through the great bull market of the '90s.
Continue your education in the field of investments by taking financial classes and reading books on investing. Two suggested readings are: Asset Allocation: Balancing Financial Risk by Roger C. Gibson and The New Commonsense Guide to Mutual Funds by Mary Rowland.
One of the biggest misconceptions in investing is that portfolio performance is based on the selection of individual securities. Instead, focus on asset allocation — nearly 90 percent of your portfolio performance is attributable to it.
Remember, moderating is key in a balanced portfolio. Keep learning and you will become more comfortable with your new portfolio.
Need to get your finances in order? Apply for a makeover
Guest columnist Ronald W. Rogé, MS, CFP, is president and founder of the fee-only Wealth Management firm R.W. Rogé & Company Inc. in Bohemia, N.Y. WORTH Magazine has continuously selected him as one of America's best financial advisers and Medical Economics says he is one of the best financial advisers for doctors. R.W. Rogé & Company Inc. is listed by Bloomberg Magazine as one of the top wealth-management firms in the country. You can visit Rogé's Web site at http://www.rwroge.com.