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Educational Programming Video

The Value Line Mutual Fund Survey
Program 20: Financial Planning Part 9

In the last several sessions, we discussed investment profiles and asset allocation. Today we'll begin to pull everything together, touching on some different types of investors and basic model portfolios.

To recap, asset allocation is simplistically defined as the diversification of financial investments among stocks, bonds, and cash, and more specifically as a move to squeeze the greatest potential return out of a given level of risk. It is the tool by which investors reach their goals. Although Diversification automatically dilutes a portfolio's potential return, some assets typically rise when others fall and others usually fall less sharply than the average. This fact makes it possible to diversify among asset classes in such a way as to lower the potential risk by a greater amount than one lowers the potential return.

But how do you use this information? How do you figure out what asset allocation is right for you? That is where knowing your risk profile, financial position, and financial goals comes in to play.

Value Line has nine basic mutual fund portfolios that it recommends, ranging from a portfolio for conservative short-term investors to one for aggressive long-term investors. We are going to briefly touch on each of the investor types.

A conservative risk posture and short time horizon is typical of those near retirement or already retired and whose current income is limited relative to the expenses and liabilities that they anticipate incurring. With little margin for error, these investors should keep all of their investments in cash equivalents.

Conservative investors with medium time horizons typically have between five and 20 years until retirement. They are probably at or close to their peak earning power. These investors do not like to take many risks, but they recognize that some investment risk is necessary to provide for the family's future needs.

A conservative risk posture and long time horizon characterizes more U.S. investors than any other profile. These individuals typically are middle-income and less than 50 years old, and they believe that they are at least five to 10 years away from their peak earning power. Their aversion to risk and their current financial limitations lead them to err on the side of caution with their investments. At the same time, they realize that they must accept some risk if they are to achieve long-term growth of capital.

Investors who have a moderate risk posture and short time horizon are typically near retirement or already retired and have planned well enough for their financial future to be assured of meeting their projected expenses and liabilities. These investors need to provide just sufficient principal growth to assure protection against inflation in their retirement years.

Those with a moderate risk posture and medium time horizon are typically between five and 20 years from retirement. They are nearing their peak earning power, and they have enough of a nest egg to sleep fairly well at night. Through profitable experience these investors understand that assuming a reasonable amount of investment risk is desirable to achieve the family's shared goals.

A moderate risk posture and long time horizon is a sound mix for wealth accumulation. Investors most likely to assume these positions are ones doing reasonably well financially at present and expect to be doing as well or better for the next 10 to 20 years. Since current needs are not overwhelming, and long-term growth is the number-one priority, stocks are generally the most appropriate investment vehicle for these investors.

An aggressive risk posture and short time horizon typifies older Americans who have planned their future well, but this characterizes very few investors. These individuals have more money now than they expect their family to need. Since long-term growth is no longer an issue, those with this profile should invest in enough stocks, bonds, and cash equivalents to ensure continuity of income for the rest of their lives.

Investors with an aggressive risk posture and a medium time horizon are typically between 40 and 60 years of age. They have earned the security not to be too concerned about their next paycheck, but they nevertheless seek to provide enough growth of capital to take care of all future needs that may arise.

An aggressive risk posture and a long time horizon are a most desirable combination. These investors have successfully taken risks and have reached their current financial situation at a reasonably youthful age. In view of the fact that long-term growth is their sole priority, stocks are overwhelmingly their vehicle of choice.

Look back at your financial position, your goals, and your risk profile and see which one of these categories best fits your situation. Then check out Value Line's How to Invest in Mutual Funds Guide and look at the model portfolios we recommend. In the next session, we'll look at all three of the moderate risk portfolios we recommend.

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