Lost: One Black Lexus
Managing Your Portfolio for Long Term Results
May, 2007
by Kelly C. Ruggles
A desperate investor placed the following message in the classified section of his local newspaper: "Lost: One Black Lexus. Large reward for the person who can help me find my assets and bring back financial acceleration to my portfolio."
One does not have to go too far back in history to understand the idea behind the message.
In early March of the year 2000, the Nasdaq Composite Index reached a level slightly above five thousand. Years later, as we approach the halfway point of the year 2005, the same index sits about 58% lower than its historic highs.
| With proper planning, when different investments are added to the portfolio, the assets performing above average tend to offset the assets performing poorly. The tendency toward dispassion promotes investment success and understanding the risk associated with each position helps to advance your financial plan. |
With a cost basis established in March of 2000, a hypothetical investment of $100,000 (tracking the Nasdaq Composite) would now have a loss of $58,000! There goes a nice new luxury car. According to Lexus, a Division of Toyota Motor Sales, U.S.A., Inc, the manufacturers suggested retail price (MSRP) starts at $56,875 for the 2005 LS.
Understanding the reasons behind past losses and focusing on present day specifics accentuates financial planning.
Depending on the unique goals, risks, and time horizons of each investor, the following generalized comments may assist all people saving for their financial betterment.
Investors are encouraged to spend time with their financial advisors. By doing so, it may assist you in keeping focused. A dispassionate approach is one of control and composure. Sometimes, emotions create irrational decisions. Your advisor brings continuity back to your financial plan. It is often better to act instead of react.
Your goals will likely affect the combination of assets in your portfolio. As you analyze your current financial situation, and before you commit your savings to any investment, a complete discussion of the risks and costs involved should take place.
For the purposes of this article, investment risk can viewed as the probability of receiving a return less than the anticipated goal. Always remember there is a risk/return trade off with every investment you own.
Here is where diversification is often introduced. Discussions regarding diversification often revolve around the concept of risk reduction, but it should also introduce the idea of return improvement. With proper planning, when different investments are added to the portfolio, the assets performing above average tend to offset the assets performing poorly.
Monitoring the plan is paramount to its success. Inevitably, weaknesses and strengths occur and you should note the positions that either achieve their anticipated goals or fall short of their goals. It is important to manage your portfolio without allowing emotions to micromanage it.
The investor searching for his/her lost Lexus does so in vain. With a 58% loss, it will now take a 138% gain from the current portfolio value to bring back the original principal amount.
The tendency toward dispassion promotes investment success and understanding the risk associated with each position helps to advance your financial plan. Based on your willingness to accept risks, a suitable diversification of assets will assist you in reaching your goals. And once your goals materialize, the pleasures of life become a reality.
©2007, Kelly C. Ruggles
Kelly C. Ruggles, President of American Reliance Group, Inc., is a registered investment advisor. Mr. Ruggles is the author of "The Financial Playbook" for Retirement.
Mr Ruggles does not intend to provide personalized investment advice through this publication and does not represent that the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.
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