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Morningstar.com's Interactive Classroom Course 306 Getting More AggressiveIntroduction Most of us don't want our 6-year-olds to punch classmates who irritate them, or suggest that they tell their great aunts how they really feel about getting their cheeks pinched. We don't want our kids to be overly assertive. Yet when it comes to investing, being aggressive isn't the worst thing, especially if you have a long enough investment horizon, an ambitious goal, and, perhaps most importantly, a stomach for volatility. This course will cover how you can determine if you're being aggressive enough with your investments, and offer various solutions for how to rev up a sedate portfolio. Are You Being Aggressive Enough?How aggressive you should be with your investments depends on three things:
To find out whether your current portfolio is aggressive enough to meet your goals, use an online asset allocation tool. If you find that your current portfolio is unlikely to allow you to reach your goal, or you find that it isn't as volatile as you may have thought, consider ways to make your portfolio more aggressive. Shake Up Your Asset MixYou can do plenty of things to amplify your long-term returns and volatility. The most significant move: Reducing your bond and cash investments and increasing your position in stocks. Many financial professionals argue that your blend of cash, stocks, and bonds contributes more to your portfolio's return and volatility than what investment styles you practice, what sectors you have exposure to, and what individual securities you choose. While we believe all of these factors play important roles in your volatility and return, we agree: Asset allocation is huge. And the more of your portfolio you have in stocks and the less you have in bonds and cash, the more intense your portfolio's performance will be. Rev Up Your Bond MixIn addition to altering your asset mix, you can inject some excitement into specific asset groups, too. Take bonds for example. Short- and intermediate-term bonds and bond funds are commonplace in investment portfolios. To boost your bond component, consider adding one or more of the following types of bonds/bond funds: Long-Term Bonds You can find long-term bond fund ideas using screening tools like Morningstar.com's free Fund Screener. Analyst recommendations such as Morningstar.com's Fund Analyst Picks are also a good source, if you are a Morningstar.com Premium Member. (Nonmembers can sign up for a free trial to Morningstar's Premium Service.) High-Yield Bonds The returns of high-yield bonds very often follow the returns of the stock market more than the returns of the bond market. Why? Because the performance of high-yield bonds is influenced by the growth and earnings of the company that issued the bond, just as the performance of a stock is influenced by the growth and earnings of the company that issued the stock. Rising or falling interest rates have little bearing on the performance of high-yield bonds. You can find ideas by using online screening tools such as Morningstar.com's Fund Screener. Using that tool, select the following inputs using the drop-down menus and checkboxes: Fund Group = Taxable Bond; Morningstar Category = High Yield Bond; and Morningstar Star Rating = 4, 5. You can change the inputs to narrow the search further. Analyst recommendations such as Morningstar.com's Fund Analyst Picks are also a good source, if you are a Morningstar.com Premium Member. (Nonmembers can sign up for a free trial to Morningstar's Premium Service.) Convertible Bonds We're not going to get into the details of that here. But because of this conversion feature, convertibles behave very much like stocks. They are generally less volatile, though, because they pay a fixed coupon (or yield). They are bonds, after all. You can find convertible fund ideas by using online screening tools such as Morningstar.com's Fund Screener. Using that tool, select the following inputs using the drop-down menus and checkboxes: Fund Group = All; Morningstar Category = Convertibles; and Morningstar Star Rating = 4, 5. You can change the inputs to narrow the search further. Analyst recommendations such as Morningstar.com's Fund Analyst Picks are also a good source, if you are a Morningstar.com Premium Member. (Nonmembers can sign up for a free trial to Morningstar's Premium Service.) Electrify Your Stock MixMost investors build portfolios around a core of large-company stocks or funds. You can heighten your performance (and volatility, of course) by exploring the following options. Mid- and Small-Company Stocks Premium Members looking for good small- and mid-cap funds can browse Morningstar's Fund Analyst Picks. (Nonmembers can sign up for a free trial to Morningstar's Premium Service.) Stock investors can find ideas by using online screening tools, such as Morningstar.com free Stock Screener, which allows you to screen for several types of mid- and small-cap stocks. You can add more inputs to narrow the search further. Growth Stocks Most of the foreign stocks that you'll own, either directly or via mutual funds, will be from large companies domiciled in developed markets. To intensify your foreign position, consider these options. Mid- and Small-Company Stocks You can find ideas by using an online tool such as Morningstar.com's free Fund Screener. Using that tool, simply use the following settings: Fund Group = International Stock; Morningstar Category = Foreign Large Blend; Morningstar Star Rating = 4, 5; Average Market Cap Less than or = $1 billion. You can change the inputs to narrow the search further. Emerging-Markets Stocks So far, emerging-markets investors have enjoyed some thrills. In 2003, funds in the emerging-markets category gained about 55% on average, and continued to post strong gains of 24%-37% on average in 2004-2007. But emerging-markets funds fell hard in 2008, dropping 54% on average, compared with a 37% drop in the S&P 500. These funds can also suffer in shorter time frames, posting double-digit losses during 11 rolling three-month periods in the past decade through October 2012, including six such periods when they plummeted 20% or more. The jury's still out on whether emerging-markets stocks will deliver gains that live up to their promise. But they certainly qualify as aggressive investments. Test Drive Before You BuyBefore deciding that you want to add small companies, emerging-markets stocks, or high-yield bond funds to your portfolio, find out how these new choices would work with and affect your current mix. Many online financial Web sites offer tools that can help. Once you see all of the holdings for your "aggressive" portfolio, answer a few questions:
You may be surprised by what you find. Becoming more aggressive doesn't always improve your chances of reaching your goal. And it'll almost always deepen your possible three-month loss. Make sure you can handle the volatility that comes with a more-aggressive portfolio. |
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Quiz 306 |
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1 | How aggressive you should be with your investments depends on what? | ||
a. | Your investment goal | ||
b. | Your ability to handle volatility | ||
c. | Your investment goal, your investment horizon, and your ability to handle volatility | ||
2 | What's the most significant move you can make to amplify your long-term returns and volatility? | ||
a. | Reducing your bond and cash investments and increasing your position in stocks | ||
b. | Reducing your large-company stock investments and increasing your position in small-company stocks | ||
c. | Reducing your foreign-stock investments and increasing emerging-markets stocks | ||
3 | Which type of bond is most like a stock? | ||
a. | Long-term bond | ||
b. | High-yield bond | ||
c. | Convertible bond | ||
4 | Why may tilting your portfolio toward growth stocks theoretically amplify its performance? | ||
a. | Because all growth stocks are small-company stocks | ||
b. | Because companies that are growing at a decent rate should outperform companies growing at a slower rate | ||
c. | Tilting your portfolio towards growth isn't a good strategy for aggressive investors | ||
5 | To rev up your foreign investments, consider: | ||
a. | Large companies | ||
b. | Companies domiciled in developed markets | ||
c. | Smaller companies |
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To take the quiz and win credits toward Morningstar Rewards go to the quiz page. © Copyright 2006 Morningstar, Inc. All rights reserved. |
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