Don't put all the eggs in one basket--- Portfolios And Diversification

It's good to clarify how securities are different from each other, but it's even more important to understand how their different characteristics can work together to accomplish an objective.

The Portfolio

A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset you own - from real items such as art and real estate, to equities, fixed-income instruments and their cash and equivalents. For the purpose of this section, we will focus on the most liquid asset types: equities, fixed-income securities and cash and equivalents.

An easy way to think of a portfolio is to imagine a pie chart, whose portions each represent a type of vehicle to which you have allocated a certain portion of your whole investment. The asset mix you choose according to your aims and strategy will determine the risk and expected return of your portfolio.

Basic Types of Portfolios

In general, aggressive investment strategies - those that shoot for the highest possible return - are most appropriate for investors who, for the sake of this potential high return, have a high risk tolerance (can stomach wide fluctuations in value) and a longer time horizon. Aggressive portfolios generally have a higher investment in equities.

The conservative investment strategies, which put safety at a high priority, are most appropriate for investors who are risk averse and have a shorter time horizon. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments.

To demonstrate the types of allocations that are suitable for these strategies, we'll look at samples of both a conservative and a moderately aggressive portfolio.

Note that the terms cash and the money market refer to any short-term, fixed-income investment. Money in a savings account and a certificate of deposit (CD), which pays a bit higher interest, are examples.

The main goal of a conservative portfolio strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation. The portfolio you see here would yield a high amount of current income from the bonds and would also yield long-term capital growth potential from the investment in high quality equities.

A moderately aggressive portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund.

The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents.

You can further break down the above asset classes into subclasses, which also have different risks and potential returns. For example, an investor might divide the equity portion between large companies, small companies and international firms. The bond portion might be allocated between those that are short-term and long-term, government versus corporate debt, and so forth. More advanced investors might also have some of the alternative assets such as options and futures in the mix. As you can see, the number of possible asset allocations is practically unlimited.

Why Portfolios?

It all centers around diversification. Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio.

There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it's really just the simple practice of "not putting all your eggs in one basket." If you spread your investments across various types of assets and markets, you'll reduce the risk of catastrophic financial losses.

Investing in sustainable companies to get competitive returns within a weak economic environment

Some investors mistakenly think that sustainable investing and competitive returns are mutually exclusive. But it’s not absolutely true.

For example, the Domini 400 Social Index, which measures the performance of sustainable companies, has outperformed the Standard & Poor's 500 stock index since its inception.

These companies have done well because they tend to approach their business with a long-term view, treat their customers, employees and shareholders with respect, and consider the environment as a vital stakeholder.

However, as with any successful investing approach, sustainable investing requires strict investment discipline to ensure success. For optimal investment results, we suggest looking for value and sustainability.

The definition of what constitutes a sustainable investment might vary, depending on the investor. Before investing, people review a blend of positive and negative factors, as well as qualitative and quantitative criteria.

To find value, we look for out-of-favor and under-followed companies whose shares are discounted heavily due to temporary factors. In today's market, forced selling has created many opportunities to buy sustainable companies at a significant discount.

Here comes the point, we exclude companies that make certain harmful products such as cigarettes, we measure each company's environmental performance and we avoid companies that operate in countries such as Myanmar and Sudan that have significant human rights violations.

We also look for companies offering products and services that promote better health, improve the economic well-being of impoverished populations and reduce their environmental impact.

We suggest investing in sustainable companies with strong balance sheets that can increase earnings within a weak economic environment.

Here are four examples:

• John B. Sanfilippo & Son Inc. (JBSS) of Elgin, Ill., owner of the Fisher Nuts brand and the largest U.S. private-label nut producer, is one of our favorite investments. From a sustainability perspective, the company represents a good holding due to the products it makes. Nuts are a high-quality source of vegetarian protein and researchers have found that people who eat nuts have lower risks of heart disease.

From a financial perspective, the company just moved its operations into a more efficient manufacturing facility and we think that gross margins could double, compared with fiscal year 2006 levels. The company is also trading at a price well below tangible book value and markedly below our estimate of liquidation value.

• Avon Products Inc. (AVP) of New York offers tremendous investment value to investors. While its business is declining domestically, Avon maintains an attractive growth profile internationally, particularly in emerging markets. Except for the most dire economic environments, women will continue to use cosmetic products. The stock has fallen considerably, though Avon has done well during past recessions. On the sustainability side, Avon maintains proactive workplace practices for women and minorities.

• Annaly Capital Management Inc. (NLY) of New York is a real estate investment trust that invests in agency mortgage-backed securities. In this recession, foreclosures are an important social issue because of the detrimental impact that foreclosures and falling home prices have on local communities.

An investment in agency mortgages through Annaly contributes to lower mortgage interest rates for homeowners, which will reduce foreclosure rates. From a value perspective, Annaly's earnings increase significantly when its cost of borrowing declines. Given the Federal Reserve Board's nearly zero interest rate policy, Annaly's borrowing costs are at rock-bottom level.

• Dell Inc. (DELL) of Round Rock, Texas, maintains the goal of becoming "the greenest technology company on the planet." Its recycling policy is innovative: Dell pays all shipping costs for any computers that are sent to it to be recycled. From a valuation viewpoint, Dell maintains a pristine balance sheet with $3.32 a share in cash, and its free cash flow yield exceeds 10%.

Its cash conversion cycle is negative, which means that customers pay Dell before the organization purchases the components it uses to manufacture computers.

Three Ways To Generate Lasting Investment Income

Investment income can be generated in many ways. Each of the three ways outlined below can be used on its own, or combined, to create either more investment income, or more capital preservation, depending on which is most important to you.

1.Build a Total Return Portfolio to Create Investment Income

The best way to create lasting investment income is to build an overall portfolio consisting of cash, fixed income and equities.

The cash and fixed income form the "safe" part of your portfolio. They will generate current investment income in the form of interest.

The equities form the growth portion of the portfolio, which allows your future investment income to increase with inflation.

There are capital preservation rules and withdrawal rules that need to be strictly followed when creating this type of portfolio.

For most people, creating an income producing portfolio, such as described above, is the best way to generate investment income that will last over a potentially long life expectancy.

This strategy is best for people:

• With long life expectancies.
• Who want to leave an inheritance.
• Who take a long term, unemotional approach to invest.

2.Investment Income Through Interest and Dividends

Another option would be to buy investments that pay consistent dividends or interest income.

Dividend income is paid by:
• Dividend Paying Stocks
• Closed End Funds

Interest income is paid by:
• Bonds and Bond Funds
• Certificates of Deposit
• Money Market Funds

Dividend and interest producing investments are best used as part of a total return portfolio outlined in section 1 above.

If used on their own, these investments are best for people:

• Who do not want to spend any of their principal.
• Who have shorter life expectancies.
• Who may not need their investment income to keep pace with inflation.

3.Use a Contractual Guarantee to Create Investment Income
When you put your money in an annuity, the insurance company gives you a contractual guarantee to pay you a specific amount of investment income, on a set date, for the rest of your life.

Annuities are best used for people:

• Who are not concerned with leaving an inheritance.
• Who are single, or couples with no children.
• Who are willing to take less income and are okay with less control of their money in exchange for a fixed, guaranteed income.
• As part of an overall strategy that also includes a total portfolio and interest and dividend paying investments as described in section 1.

Source from: moneyover55

Three Ways To Generate Lasting Investment Income

Investment income can be generated in many ways. Each of the three ways outlined below can be used on its own, or combined, to create either more investment income, or more capital preservation, depending on which is most important to you.

1.Build a Total Return Portfolio to Create Investment Income

The best way to create lasting investment income is to build an overall portfolio consisting of cash, fixed income and equities.

The cash and fixed income form the "safe" part of your portfolio. They will generate current investment income in the form of interest.

The equities form the growth portion of the portfolio, which allows your future investment income to increase with inflation.

There are capital preservation rules and withdrawal rules that need to be strictly followed when creating this type of portfolio.

For most people, creating an income producing portfolio, such as described above, is the best way to generate investment income that will last over a potentially long life expectancy.

This strategy is best for people:

• With long life expectancies.
• Who want to leave an inheritance.
• Who take a long term, unemotional approach to invest.

2.Investment Income Through Interest and Dividends

Another option would be to buy investments that pay consistent dividends or interest income.

Dividend income is paid by:
• Dividend Paying Stocks
• Closed End Funds

Interest income is paid by:
• Bonds and Bond Funds
• Certificates of Deposit
• Money Market Funds

Dividend and interest producing investments are best used as part of a total return portfolio outlined in section 1 above.

If used on their own, these investments are best for people:

• Who do not want to spend any of their principal.
• Who have shorter life expectancies.
• Who may not need their investment income to keep pace with inflation.

3.Use a Contractual Guarantee to Create Investment Income
When you put your money in an annuity, the insurance company gives you a contractual guarantee to pay you a specific amount of investment income, on a set date, for the rest of your life.

Annuities are best used for people:

• Who are not concerned with leaving an inheritance.
• Who are single, or couples with no children.
• Who are willing to take less income and are okay with less control of their money in exchange for a fixed, guaranteed income.
• As part of an overall strategy that also includes a total portfolio and interest and dividend paying investments as described in section 1.

Source from: moneyover55