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Getting More ConservativeIntroduction
You hate Rush Limbaugh. Blue suits, too.
Yet maybe your investment portfolio could use a little conservatism. Perhaps you overdosed on a hot sector and suffered one heck of a hangover when it cooled off. Or maybe your portfolio just doesn't need to be very aggressive for you to meet your goals.
This course will cover how you can determine if you're being too aggressive with your investments, and offer various solutions for how to dull an edgy portfolio--at least a little bit.Are You Being Too Aggressive?
How aggressive you should be with your investments depends on three things:
To find out whether your current portfolio is too aggressive for your goals, use an online asset allocation tool.
If you find that you're more than likely to meet your goals given your current portfolio, or you find that your portfolio is far more volatile than you thought, consider ways to make your portfolio more conservative.Alter Your Asset Mix
You can do plenty of things to damp your volatility. The most significant move: Reducing your stock investments and increasing your position in cash and bonds.
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 less of your portfolio you have in stocks and the more you have in bonds and cash, the more sedate your portfolio's performance will be.Restrain Your Bond Mix
In addition to altering your asset mix, you can curtail the volatility in specific asset groups, too.
For instance, many portfolios include intermediate-term bonds at their core. To damp the volatility of an intermediate-term-bond portfolio, consider adding a short-term bond fund to your mix.
Because the maturity dates of short-term bonds are nearer than those of intermediate-term bonds, short-term bonds tend to be less volatile. They often yield less, as well. Finally, they usually gain less than intermediate-term bonds when interest rates fall, but lose less when rates rise.
Many online financial Web sites, such as Morningstar.com, offer screening tools that are a good starting point for ideas about conservative bond funds. Additionally, analyst recommendations, or picks, are a great place to begin, too. Morningstar.com Premium Members can access Morningstar Fund Analyst Picks. (And nonmembers can sign up for a free trial.)Subdue Your Stock Mix
Lessen your portfolio's volatility by exploring the following options among U.S. stocks.
Very Large Companies
But the faster the growth and the smaller the company, the more volatile the stock, too. So if curtailing volatility is your goal, focus the U.S. stock portion of your portfolio on the very largest companies. They may not have the same growth potential as smaller companies, but they don't have the same volatility, either.
If you are looking for a good large-company stock fund, you can find ideas by using an online Fund Screener or Stock Screeneror browsing analyst recommendations such as Morningstar.com's Fund Analyst Picks, which are available to Premium Members or those taking a free trial.
Let's take an example. Acme Cement Company's stock price falls from $100 per share to $95 per share in one year. That's a 5% loss. However, the company pays a $7.00 per-share dividend each year. At the end of the year, shareholders have a $95 share price and a $7 dividend. So they haven't really endured a 5% loss. It's really a gain, thanks to the dividend.
Dividends won't always turn losses into gains. But they can curtail volatility.
You can find potential investment ideas by using the Morningstar Screen of High Dividend Yields.
Reasonably Priced Stocks
If the earnings, sales, or cash flows of these companies don't live up to expectations, however, their stock prices can plummet.
To avoid such price dives, stick with companies whose stocks are trading at moderate prices relative to their earnings, sales, and/or cash flows.
Find ideas by using the Morningstar Screen of Low-Priced Growth Stocks.Tone Down Your Foreign Mix
If you've been aggressive with your foreign mix, you've most likely been drawn to mid- and small-company foreign stocks, or emerging-markets stocks. Though both offer the promise of big returns, both are very volatile.
To curtail volatility in your foreign position, focus on large international companies that are domiciled in developed markets. They may not have the same growth potential as smaller companies or emerging-markets stocks, but they don't have the same volatility, either.
Find ideas by using an online fund screener. For example, we set Morningstar.com's Fund Screener with the following inputs: Fund Group = International Stock; Morningstar Category = Foreign Large Blend; Morningstar Star Rating = 4, 5; and Average Market Cap Greater than or equal to $10 billion. You can change the inputs to narrow the search further.Test Drive Before You Buy
Before deciding that you want to add dividend-paying stocks, developed-markets stocks, or short-term 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 "conservative" portfolio, answer a few questions:
You may be surprised by what you find. You may see, for example, that you're becoming too conservative. Or, conversely, that the changes you want to make aren't going to make much of a difference as far as your future returns or future volatility are concerned. Or you may find that you've built a better portfolio for your goal.
|1||How conservative 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 damp your long-term volatility?|
|a.||Increasing your bond and cash investments and decreasing your position in stocks|
|b.||Increasing your position in large-company stocks|
|c.||Buying developed-markets stocks|
|3||Which type of bond is going to be the least volatile?|
|4||Why should tilting your portfolio toward larger-company stocks and away from smaller-company stocks curtail its volatility?|
|a.||Because all large-company stocks are growth stocks|
|b.||Because larger companies growing at a slower rate should be less volatile than smaller companies growing at a faster rate|
|c.||Tilting your portfolio toward large-company stocks isn't a good strategy for conservative investors|
|5||To tone down your foreign investments, consider:|
|a.||Large companies domiciled in developed markets|
|b.||Companies domiciled in emerging markets|
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