- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Understand and Use the Priority of Money
- Describe the Phases of Successful Investing
- Explain the Investment Process and Learn How to Build Your Portfolio
- 1. Determine Your Initial Target Portfolio Monetary Goal
- 2. Determine Target Percentages for Each Asset Class
- 3. Calculate the Target Amount for Each Asset Class in Both Taxable Accounts and Retirement Accounts
- 4. Research Potential Candidates for Financial Assets and Select the Assets Most Likely to Help You Achieve Your Goals
- 5. Purchase the Assets and Compare the Actual Portfolio with the Target Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Examining a Sample Portfolio
The following is an example to help you understand the process of investing: Jim is twenty-five years old; he is married and is the father of one child. He earns $50,000 a year, is a full tithe payer, and has adequate health and life insurance. Jim is out of credit card and consumer debt and has written a detailed investment plan. Jim is an aggressive investor, and he wants to maintain six months of income in his emergency fund. The following data come from Jim’s investment plan. Using the investment process discussed in this section, we will follow Jim and his wife through the five steps of the investment process.
|Phase||Asset Class||Financial Asset||Benchmark
|Emergency||Cash/bonds||Fidelity bond||Lehmann Ag.||25%||25%||0%|
|Core||Large cap||Vanguard 500||S&P 500||55%||35%||20%|
|Diversity||International||Oakmont Int’l.||MSCI EAFE||10%||6%||4%|
|Diversity||Small cap||Wells Fargo||Russell 5000||10%||6%||4%|
First, Jim must determine the target size of his portfolio. Jim’s goal for his emergency fund is six months of income ($25,000), and his target allocation for cash and bonds is 25 percent. To calculate the target size of Jim’s portfolio, divide $25,000 by 25 percent, which equals $100,000, his initial target monetary goal.
Second, Jim must determine how much he should invest in each asset class. Jim’s target portfolio size is $100,000: he wants to invest 25 percent in his emergency fund ($25,000), 55 percent in his core ($55,000), and 10 percent in both international and small-capitalization funds ($10,000).
Third, Jim must calculate the amount of each asset that he should allocate to taxable accounts and retirement accounts during each phase of investing. Multiply the target allocation of each asset by the target portfolio size. In this case, Jim’s allocations would be as follows:
|Total target size||$72,000||$28,000||$100,000|
Fourth, since Jim and his wife have already selected the funds they wish to purchase, they can bypass this step.
Fifth, Jim and his wife must purchase the funds they selected.
The investment process is a disciplined, systematic approach to constructing an investment portfolio. It is only one of many ways that one may approach building a portfolio. Some final cautions about building a portfolio are important:
Remember to invest in your emergency fund first. You should purchase the assets that will comprise your emergency fund first. You might consider making no-load open-end mutual funds an important part of your emergency fund because of the liquidity of no-load funds.
When you receive your paycheck, remember to pay the Lord first (tithing and other charitable contributions) and yourself second (a minimum of 10 to 20 percent). Put the money you have used to pay yourself directly into your emergency fund until you have saved at least three to six months of income. While you are in the process of building your emergency fund, the only other investment you should consider is a retirement account that provides free money through a matching plan (see the discussion on the priority of money). If this type of retirement account is available to you, invest the minimum amount necessary to receive your free money, and then use the rest of your savings to fill your emergency fund.
Finally, do not begin prepaying your mortgage, i.e. making additional mortgage payments, until you have saved at least three to six months of income in your emergency fund. If problems arise that limit your income, a large emergency fund is often the key to surviving and keeping your home.