| One of the best things that came out of the | | | | an adequate bond portfolio (many others will |
| latest market downturn is clearly that people | | | | argue that even $1 million is insufficient to take |
| have re-evaluated the importance of risk | | | | advantage of the income class). There is one |
| management. Whether these people manage | | | | exception: if you are an expert in fixed income |
| multi-billion dollar credit portfolios like those folks | | | | assets. |
| who are employed by lenders who underwrite | | | | Which means the balance of your portfolio will |
| mortgages or these people are individual investors | | | | need to be invested through funds (including |
| looking to save for retirement, risk management | | | | ETF's) because if you are a bond expert, it is |
| probably will not be something people of this | | | | unlikely that you will also be as astute on the |
| generation will ignore ever again. | | | | equities side. |
| For the individual investor, risk management | | | | So where does investment management |
| means a couple of things. One, how much risk can | | | | customization happen? With mutual funds, you can |
| I tolerate in my portfolio or, more accurately, | | | | essentially "hire" someone with enough letters |
| how will I feel if I see my portfolio drop 30% | | | | behind his or her name to fill a Scrabble pouch and |
| again? Two, what are my investment goals? Do I | | | | at a relatively good price. This means you have |
| need $4 million or do I already have $4 million and | | | | someone who is considered "the best" among his |
| all I need to do is hold tight between now and the | | | | or her peers managing a portion (or all) of your |
| date I need this money? Three, how much time | | | | money. Something you do not have to worry |
| do I have to save that $4 million (of course, $4 | | | | about while you manage the area of your |
| million is just an illustration; you might need much | | | | portfolio that you are an expert at. |
| more or, quite likely, much less than that). | | | | Another reality is that most mutual funds will |
| Depending on these three answers (which can be | | | | turnover at least 1/2 of their holdings once per |
| further diluted into six or sixty answers to | | | | year. This means that while you are busy with |
| different questions asking, roughly the same | | | | your full-time job, even if that is managing the |
| thing), investors should be able to gauge how | | | | rest of your assets, this part of your portfolio is |
| much equity risk they are willing to endure. If | | | | being actively managed, reviewed and traded. |
| there is high risk, then they may look at 80% | | | | Another nice thing to know; peace of mind. |
| equities in their portfolio, which can consist of | | | | In fact, investors who are far too busy to |
| various degrees of risk (e.g. small cap value, | | | | manage the part of their portfolio that they are |
| foreign equity, options, etc.). But that remaining | | | | expert in may want to consider a portfolio of |
| 20%? Well, part of it should be in cash, of course, | | | | funds or a balanced fund, both of which are |
| but for long-term investors, that 20% should | | | | actively managed as well and, normally, monitored |
| probably get pumped into the income class. That | | | | regularly. |
| means bond funds, high yield investments, term | | | | Regardless of the need or weakness in your |
| deposits. | | | | portfolio, there is surely a mutual fund that can fill |
| Ultimately, this 20% will end up in mutual funds. | | | | the gap and turn a mediocre portfolio into a well |
| Why? Because even a very aggressive $4 million | | | | (okay, properly)-diversified portfolio. This is |
| dollar portfolio with 80% equities would leave only | | | | important... just think back over the last 3 years |
| $800,000 for bonds and at this level of | | | | and remember that sinking feeling every time you |
| investment, anything under $2 million cannot build | | | | looked at your portfolio. |