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Educational Programming Video

The Value Line Mutual Fund Survey
Program 21: Financial Planning Part 10

In our last session, we discussed nine investment profiles, one of which likely fits you. You can find the actual mutual fund portfolio allocations that Value Line recommends for each investor type in the How to Invest in Mutual Funds Guide, which is available on the Value Line Web site. We're going to discuss the three moderate risk profiles. We chose the moderate risk profiles because most people will fall into this investment category.

Investors with short-term time horizons and moderate risk profiles are likely to be near retirement or already retired, perhaps in their late fifties to early sixties. Their children are either in collage or already out in the working world. This leaves extra money to put toward retirement savings, but that money will be needed very shortly. Also, this investor's house is either paid off or very near to being paid in full, which will free up even more cash. It is the money that has been saved up until now, though, that has been invested in the stock market. Now it is time to start shifting some, but not all, of that money, into more conservative investments. The key here is to make sure you have enough capital growth to ward off the effects of inflation.

Value Line recommends that these types of investors hold 49% of assets in cash and cash equivalents, 25% in bond funds, and the remainder in equity funds. This should create a relatively stable portfolio that provides both income and some capital growth. Twenty two percent of the portfolio is invested abroad. The bond component is broken down to 8% domestic bonds, 8% high yield bonds, and 9% foreign bonds, while the stock component is 4% in large-cap growth, 4% in large-cap value, 2 % in small-cap growth, 2% in small-cap value, 8% foreign stock, 5% emerging market, and 1% gold and natural resources funds. At first blush investors might be concerned over the large percentage of foreign investments and higher risk investments, such as emerging market equities. The key point to remember is that all of these categories do not move in tandem, so that overall gains should be higher while overall risk should be lower.

Investors with medium time horizons and moderate risk profiles are probably in their late forties to early fifties. That gives these investors plenty of time until retirement. Although near their peak earnings, they can still expect to do better in the coming years. This investor's children are most likely in middle or high school. This means that big college tuition bills are looming. The house still isn't paid off yet, but there is ample money to pay the mortgage bill and save for retirement. This group, however, has likely planned reasonably well for the future and has enough of a nest egg to sleep fairly well at night. Experience has taught these investors that a reasonable amount of investment risk is necessary to achieve their goals.

For this group, Value Line recommends only 12% of assets in cash, 44% in bonds, and 44% in stocks. Thirty six percent of this portfolio is in foreign investments. Note the dramatic drop in cash; since short-term goals are not as much of an issue, these investors can afford to put more of their money into more aggressive investments. Within the domestic equity area, large-cap growth funds should make up 8% of this portfolio, large-cap value 7%, and the small-cap growth and value weightings remain low at 2% and 3% respectively. Gold and natural resources funds should remain at about 1% of the portfolio. The foreign equity weighting jumps up to 13% and emerging market doubles to 10%. On the bond side, domestic bonds should comprise 17% of the portfolio; high yield bonds should make up 14%, and foreign bonds 13%. Again notice the significant amount of foreign exposure in this portfolio, as well as the focus on large-cap companies.

Individuals with a moderate risk posture and long time horizon have one of the best combinations. Investors in this group are most likely to be doing reasonably well financially at present and expect to be doing as well or better for the next 10 to 20 years. Since long-term growth is the number-one priority, stocks are generally the most appropriate investment vehicle for these investors.

For this group, foreign stocks make up 50% of Value Line's recommended portfolio. Stocks comprise 80% of the portfolio, bonds 20% with no weighting given to cash. Of course you should make sure you have a cash cushion in a bank account in case of emergencies, but for investing purposes, stocks and bonds are where it is at. Large-cap growth and value funds weigh in at 12% of assets each, with small-cap growth and value standing at 8% and 7%, respectively. Gold and natural resources funds are dropped from this allocation scheme. Foreign stocks make up a whopping 25% of the portfolio, with emerging markets showing up at 16%. These are both very large numbers compared to the other two portfolios. Domestic bonds weigh in at 6%, high yield investments at 5%, and foreign bonds at 9%. Stocks are the main highlight here, and even the bond component is tilted toward more aggressive investments with 14% in foreign or high-yield issues.

Now you have figured out what type of investor you are and created a portfolio allocation scheme. Next session, it's time to start picking mutual funds.

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