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How Diversified Do You Need to Be?

The first step to properly diversifying your investment portfolio is to create money “baskets” to address your various financial goals. For instance, you might have five goals-perhaps an emergency fund, buying a car, buying a home, saving for a child’s college expenses and saving for retirement. Each goal requires a diffferent level of saving at a different time.

The amount of time you have to reach a particular goal-and how upset you’d be if you ended up with less money than anticipated-will have a big influence on how each basket is invested. Money saved for short-term goals must be invested fairly conservatively and, consequently, in lower- yielding investments, whereas money set aside for longer- term goals can be invested more aggressively.

Here’s a sample work sheet showing how a hypothetical investor, Suzie Smart, divvies up her money based on her short-term goals. The second work shet is for you. Expected annual returns are based on average annual returns of various investments betweem 1926 and 1996, based on data published by Ibbotson Associates, a market research and consulting firm in Chicago.

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Sample Work Sheet

Suzie’s stats: Suzie, age 30, earns $40,000 annually. Her goals boil down to creating an emergency fund, saving for a house and for retirement. Her job is secure and she’s not to going to sweat over how long it takes to buy a house, so she’ll take a touch more risk than an investor who has more pressing short-term priorities. She’s young and doesn’t have a trust fund, so she’ll slowly build to meet her goals.

Goal: Emergency

Time Frame: any time

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Investment Mix: 100% cash

Amount Invested now: $500

Additional Monthly Investments: $10

Expected return: 5.0%

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Goal: House

Time Frame: 3 to 5 years

Investment Mix: 60% stock; 40% bonds

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Amount Invested now: $500

Additional Monthly Investments: $50

Expected return: 8.9%

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Goal: Retirement

Time Frame: 30+ years

Investment Mix: 80%; 20% bonds

Amount Invested now: $10,00

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Additional Monthly Investments: $200

Expected return: 9.8%

Portfolio: Cash $500 (4%); Stocks $8,600 (75%); Bonds $2,400 (21%); Total $11,500

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YOUR WORK SHEET

Goal:

Time Frame:

Investment Mix:

Amount Invested now:

Additional Monthly Investments:

Expected return:

Portfolio:

Cash:

Stocks:

Bonds:

Total:

* Based on historical data provided by Ibbotson Associates and on current yields for six-month and one year certificates of deposit.


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