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Money Matters


By Mary Lynne Dahl, Certified Financial Planner ™


January 08, 2021
Friday PM


jpg Money Matters by Mary Lynn Dahl

Mary Lynn Dahl

(SitNews) Ketchikan, Alaska - I imagine that you have heard the phrase “don’t put all your eggs in one basket”. It doesn’t need much explanation, as it is just common sense. It reduces our risks, a major goal in any investment portfolio. No one wants to risk losing all of any investment just because they invested every dime in only one thing. However, some people forget about this common-sense key to investing. After more than 35 years as a Certified Financial Planner™ and investment advisor professional, I am pretty sure why this is so.

It is because too many investors allow their emotions to guide their decisions when choosing investments. This is certainly understandable. We have a lot of feelings about money in general, so our emotions do get in the way of making good financial decisions too often. However, there is a way to solve this problem and avoid this classic error.

To avoid putting all of your eggs in one basket, the solution is to design a diversified portfolio. A diversified portfolio starts with what is called an “Asset Allocation Plan”. It sounds technical, but it is not. It is, thankfully, just common sense. Not a difficult concept to understand and not difficult to put into action. The following is a simple method to do this.

Step 1. Divide the total amount of money you have for investment into equal amounts. Each separate amount will be one category, or allocation. For example, if you have $50,000, divide this into 5 categories of $10,000 each. The larger your total amount, the bigger each category can be. For example, if you have $250,000, you could have 10 categories of $25,000 each.

Step 2. Set goals and be specific. For example: the goal is retirement in 15 years, with enough in total investment value to equal 50% of your living expenses at that time. This means to keep track of your living expenses and know from calculating the potential income from your total invested dollars, to replace 50% of your income. For example, if your investment portfolio needs to provide you with income of $50,000 per year in retirement, you must accumulate about $1 million in portfolio value (really!) when you retire. If this is what you calculate you will need in 15 years, or whenever, you absolutely must accumulate $1 million in investment value. You will not make it otherwise, so buckle down and get serious about this. It can be done.

Step 3. Research or simply select your categories for investment. Make sure that each one is different, as a category, from each of the others you will choose. There are several ways for a category to be different. Generally, the easiest way is for each category to represent a specific type of investment and/or a different economic sector of the world economy.

For example, stocks are a different category from bonds. They are 2 specific and different types of investments. Another example, by sector, is that tech stocks are a different category from health care stocks. Each could be a separate category. Building a portfolio with 10 categories is a good goal, but you can start with as few as just 2 categories and add more as you add dollars to your portfolio. An example of starting with just 2 categories is for one to be a mutual fund or exchange-traded fund (ETF) of the total stock market and another to be a mutual fund or ETF of only small company stocks. Each is different from the other so each could be a separate category. At the end of this article, I will list a number of common categories used in an asset allocation plan.

STEP 4. Research and identify the level of risk in each category. A good resource for getting this research information is Morningstar Ratings. They are available at public libraries or by subscription. For example, Morningstar lists the risk level of a mutual fund or ETF of stocks of large US companies at lower risk than a mutual fund or ETF of stocks of very small (micro-cap) US companies. Another example is that Morningstar will rate a junk bond fund or ETF at high risk as compared to a AAA grade bond fund or ETF at low risk. You should always be aware of the risk rating of any investment category you are considering. Junk bonds as a category are not normally a recommended category for any investor wanting to reduce or avoid risk, so it is probably not a category you would even consider, but it is a category. Check out the list at the end of this article for ideas of categories to actually consider.

Step 5. Select one or several mutual funds or ETFs for each category. Look for a fund or ETF, in each category, that has a long track record, preferably 10 years or longer. The track record, using Morningstar rating data, should include annual returns, long term average returns, risk levels, costs and expenses, plus it will also give you list of the largest holding of that fund or ETF. There is a lot of additional data in the Morningstar report, but these are the essentials to know about initially. Read it all, but pay close attention to the basics.

Step 6. Decide on whether or not to rebalance your asset allocation annually. To get a better idea of what it means to “rebalance”, review my article on the subject published just prior to this article, in the MONEY MATTERS archives in as a reference.

Once you have set up a portfolio of a number of different funds or ETFs, each in a different category of investment, you will have a portfolio with less risk than if you had all of your eggs in one basket, and you will generally be rewarded with better, more consistent returns over longer periods of time. This doesn’t mean you will avoid the ups and downs of the market, but it does mean that you will be better protected against extreme swings and an emotional rollercoaster than can accompany a poorly allocated portfolio with too much in one or only a few categories.

As promised, here is a sample list of asset allocation categories to consider:

Large company US stocks
Mid-size company US stocks
Small company US stocks
Total stock market US stocks
S&P 500 stocks
Foreign stocks
World stocks (US plus foreign)
Bonds (all kinds)
Sector stocks: Tech sector, health care sector, industrial sector, consumer goods sector, transportation sector, aerospace sector, bio-tech sector, energy sector, clean energy/environmental sector, artificial intelligence (AI) sector, communications sector, rising dividend stock sector, socially responsible sector, agricultural sector, high grade bond sector, junk bond sector, municipal (tax-free) bond sector, real estate sector and precious metals sector, among others.

As always, I remind you to either do the homework (do not shoot from the hip) or get professional advice. As an investor, the more you know and understand, the better your long-term results are very likely to be, whether you do it alone or work closely with a trusted, unbiased professional to guide you through to your goals. Good luck and get started!




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©2020 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.

Mary Lynne Dahl ©2020

Mary Lynn Dahl can be reached at


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