AN INVESTOR’S BEST FRIEND—ASSET ALLOCATION
The mutual fund he had picked was a highly sectorized fund that had performed poorly. While other mutual funds were making money during 1998 and 1999, this fund had continued to lose value and underperform. The stocks he picked fared poorly as well. Two were health care stocks, two were Internet stocks, and the fifth was a small cap stock. All the stocks were valued at less than $3 when we met.
He knew that he needed to do something, but was so upset that he didn’t know what. Together we discussed diversifying his portfolio to help stabilize it. I put together a financial plan for him and showed him the different asset classes that were recommended. We were able to liquidate a couple of the stocks he held, as well as the mutual fund. We then invested the proceeds across different sectors, including international stock funds, high- and low-grade bond funds, and large company stock funds. Fortunately, we were able to preserve a lot of what remained. However, we had to keep some of the stocks he held because there wasn’t a big market for them. We are continuing to sell these off over time, as they continue to make the value of the portfo- lio jump around wildly.
Diversification into international funds may also be suitable for you. We have become a global-based economy, with countries becoming very connected. Staying invested in just one economy also remains risky. Each of the world’s largest markets has experienced a decline of 30 percent or more over the past two decades. Most notably has been the fall of the Japanese market. In just 10 years, the Nikkei dropped from 38,915 in December of 1989 to 13,406 in Sep- tember of 1998. In July of 2001, it hit 11,609, its lowest point since January of 1985. Being invested in just the Japanese market would have spelled doom for that investor.
Likewise, I try to make sure that each of my clients has some sort of fixed investment that helps stabilize the portfolio when the overall market is down. While diversification won’t totally protect a client’s portfolio from losses when the market is down, it will help preserve most of the portfolio’s value. After analyzing a client’s current hold- ings, time frame, goals, and comfort level, I will recommend one or more investments that I believe will help them. In the past, I have rec- ommended fixed annuities, which grow at a certain rate of interest