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Investing - Part II	5/15/2009
OK, I've revealed that I am a passive investor. So what? Well, I have confidence that if I invest across a wide spectrum of securities in the U.S Securities markets, I can make some money in the long run. I know that, basically, I can trust that people will continue to advance the ball down the playing field and that, as America continues to grow, I will grow with it. Are all index funds the same? Are there certain index funds that I should avoid because they contain assets that are too risky for my tastes? Good questions! No, not all index funds are the same. It is important to select funds that use indices that "fit" the investor. The first step in investing is to conduct an assessment of the investor's overall investment profile. This survey asks such relevant questions as the investor's age, the investor's investment objective, where they are currently investing there money, when they expect to begin withdrawing money and at what withdrawal rate, level of risk tolerance, etc.. Based on the investor's answers to these questions, the results are "weighed" and an investor profile score is tallied. The investor's profile score is then used to place him or her in the right asset allocation model. For example, it might be determined that Elmer, age 63, nearing retirement will need to start withdrawing money from his investment in two years. Elmer is not willing to taker great risks with this money. His overall score was 19. His circumstances indicate he would be best served by a "Short-Term Conservative" asset allocation model. Sharon, on the other hand, is an adventurous 28 year old who has a good job and might not need to start drawing from her investments for decades. Her score of 88 indicates that she should be classified in the "Long-Term Aggressive" asset allocation model. Once these allocation models are determined, it becomes a matter of finding the right TYPES of assets needed to fill the model. Elmer's portfolio might best consist of 10% Large-Cap Growth stocks, 35% Short-to-Intermediate bonds, 15% high-yield bonds and 40% Cash Equivalents. Sharon's portfolio, on the other hand, might best consist of 10% Large-Cap Growth stocks, 20% Large-Cap Value stocks, 10% Small-Cap stocks; 5% Real Estate, 10% International stocks, 5% High Yield bonds, 20% Short-to-Intermediate bonds and only 20% cash equivalents. See the difference here? Finally comes the time to select the SPECIFIC funds to invest in to achieve the correct portfolio asset mix. Instead of my picking companies to invest in to create my own mutual funds to achieve the correct investment mix or instead of investing in mutual funds whose companies were hand-picked by a funds manager, I will look for an index fund or a group of index funds that will by definition contain dozens or hundreds of holdings of each asset type needed in the portfolio. For instance, in order to fill the need for investments in Large-Cap stocks for Elmer and Sharon, I will look for an index fund that contains Large-Cap Growth stocks. When I find one, these stocks will be spread over the entire range of the index's holdings giving me holdings in dozens or hundreds of Large-Cap stocks and thereby the diversification I seek by index design. Finally, one index fund might contain more than one asset type, so I might be able to find an index fund that will give me both Large-Cap Growth stocks, Large-Cap Value stocks and Small-Cap Stocks. More next time.... back