MANAGING YOUR INVESTMENT PORTFOLIOAuthor(s): LAWRENCE A. KRAUSESource: ABA Journal, Vol. 73, No. 11 (SEPTEMBER 1, 1987), pp. 102-103Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/20759503 .

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Your Finances

MANAGING YOUR INVESTMENT PORTFOLIO

BY LAWRENCE A. KRAUSE

What distinguishes the neo

phyte investor from the seasoned pro? One makes scattershot purchases; the other builds a portfolio.

There is a knack to making the right purchases at the right time, to collecting a series of assets that rein force each other and secure multiple objectives. It starts with knowing basic investment principles.

One purpose of investing is to maintain the purchasing power of your capital. If your present lifestyle requires an income of $2,500 a month, do you know how much money you will need 20 years from now if infla tion is only 5V6 percent? Each month you will need $7,295 to buy the same kind of life that $2,500 purchases to

Lawrence A. Krause is a San Francisco-based certified financial planner and the author of The

Money Go Round.

102 ABA JOURNAL / SEPTEMBER 1, 1987

day. You need to manage your in vestment portfolio so that it will earn a rate of return equal to or higher than the rate of inflation.

This requires a standard for evaluating the worth or appropriate ness of any investment. That stand ard is what you spend today and, taking inflation into account, what you intend to spend in the future. As Yogi Berra has said, "If you don't know where you're going, you'll probably wind up someplace else."

LONG TERM OBJECTIVES How do you ensure that you

don't wind up "someplace else"? Take a look at your objectives and see if your assets are matched to these goals.

Are you more interested in safety of principal, current income or the moderate or rapid growth of your principal assets?

Preservation of assets. When safety is the most important concern,

choose money market accounts, in

sured bank certificates of deposit (CDs) and short-term U.S. Treasury securities.

Investment income. When your goal is to earn interest income at minimal risk to the principal asset, choose government securities, mu

nicipal bonds, quality corporate bonds, high-income stocks such as utilities and certain real estate in vestments.

Capital appreciation. When you are willing to take a greater risk of loss of assets in exchange for greater growth of principal assets, choose common stocks and real es tate.

Aggressive capital apprecia tion. When you are willing to assume a high risk of your assets in exchange for higher growth or speculative in crease in asset value, choose develop mental projects such as corporations or real estate. Invest through stock or direct purchases.

ABAJ/John Schmelzer

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Obviously, one cannot achieve all four goals in a single portfolio, but it is possible to tailor your portfolio to be sensitive to financial trends.

For example, to take advantage of a boom-or-bust period, build an in vestment pyramid with a substantial position in secured investments. The mix might look like this: 35 percent in money market accounts or CDs; 25 percent in short-term individual cor porate bonds or mutual funds (or municipal bonds if the tax bracket is appropriate); 20 percent in individ ual high quality growth-oriented common stocks or mutual funds; 15 percent in individual real estate or limited partnerships and 5 percent in individual growth stocks or a similar type of mutual fund.

THE RISK FACTOR There is no sure thing in invest

ing. You cannot escape risk, but you can manage it through diversifica tion and still choose among low-risk,

moderate-risk, and high-risk invest ments.

When managing risk, you need to determine how much financial and emotional risk you are willing to take. If you invest in something that keeps you awake at night, it is unlikely that it will turn out right for you. Even passive investments that you do not control need to be ones with which you are comfortable.

The critical question is whether you can accept and recover from a decision that doesn't work out right. You need to measure the risk in each investment you consider and ask these questions:

Would it bother me if I lost an opportunity for a significant gain?

Would it affect me if I knew the investment could drop in value?

Would my life be altered if I lost the entire investment?

Would I risk money set aside for such things as my child's education or my retirement?

Would I borrow money for this investment?

If you have answered these questions honestly, you have given yourself investment direction. The next step is determining the assets that implement these objectives.

The specific steps of picking stocks and bonds, mutual funds and real estate for your personal portfolio will be detailed in the next three issues.

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ABA JOURNAL / SEPTEMBER 1, 1987 103

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