Building and managing your portfolio

PHUKET: In prior articles, planning for and managing retirement was discussed. The key is getting to the end goal, which is to have a worry-free retirement. Once retirees have gone through the steps, all that’s left is to build and manage their portfolios.

Portfolio management is perhaps the most critical aspect to any retirement. With the help of a trusted adviser, it’s actually quite simple and doesn’t require too much time or effort. With many clients, a meeting and portfolio evaluation occurs on a quarterly basis. The key to success is developing a diversified portfolio, creating a plan and then sticking with it through the ups and downs of the market.

The essential building blocks of a strong portfolio are low-cost ETFs (exchange-traded funds) and US-traded blue-chip stocks. I recommend the low-cost ETFs from Vanguard. Vanguard has been around since 1975 and manages over US$2.4 trillion in client assets. I don’t know of a safer or more dependable firm.

When establishing your plan, the first thing to consider is separating long-term goals from short-term goals. Remember, investing is for meeting long-term goals and saving is for meeting short-term goals.

The risk of a decline in stock and bond prices is something to consider for money that may be needed in the short-term. Investing in the stock and bond markets is for money that is needed many years from now. That’s why allocating assets according to long-term and short-term goals is extremely important.

The second thing to think about is diversification. Investors don’t want all their eggs in one basket. It’s best to own several different ETFs to limit overall risk or a diversified stock portfolio that invests in healthcare, industrials, materials, energy and technology sectors. Not everything goes up or down together. Being diversified reduces your risk profile, which is very important in retirement.

Diversification consists of choosing the right mix of assets for a portfolio. In other words, what percentage should be in stocks and what percentage in bonds? Then, of these percentages, how much should be in growth stocks, value stocks, dividend stocks, long-term bonds, short-term bonds, corporate bonds, tax-free municipal bonds, government bonds, corporate bonds and so on.

How are percentages determined? There are a number of factors to take into consideration when determining portfolio allocation. Factors include: age, objectives, time horizon, cash-flow needs and risk tolerance. How much risk is acceptable with a portfolio? Some clients just want to protect the principal and live off the income, while others want to have more stocks and look to build their portfolio. Again, it all comes down to what is right for the individual. Circumstances differ, and that’s why a custom portfolio that meets specific needs is critical.

Once percentages are determined, attention should be turned to buy-and-hold index funds from Vanguard. The reason this is done is to keep costs low. One thing that eats away at retirement is high fees. Minimizing costs helps retirees keep more of what they earn.

The next series of finance articles in the Phuket Gazette will delve deeper into the types of stocks and ETFs recommended, as well as how they can help grow portfolios. As always, remember it’s never too late to start investing. The key is developing a custom plan that’s a good fit.

Don Freeman is president of Freeman Capital Management, an independent US Registered Investment Advisor. He has over 15 years experience and provides personal financial planning and wealth management to expatriates. Specializing in UK and US pension transfers. Call 089-970-5795 or email: freemancapital@gmail.com.