“The next thing I say to you will be true.  The last thing I said was a lie.” — Devo

Last week I wrote about my Three-Minute Portfolio based on low-expense-ratio index funds.  That’s a great way to put your investments on autopilot.  However, an index fund, by definition, will never beat the market.

If you’re willing to put a little time and attention into your investments you can make a portfolio that will (probably) do a bit better than the market.

Didja’ notice some wishy-washy words in that last sentence?

• “Probably”:  No one can guarantee you returns that beat the market.  Anyone who does is related to Bernie Madoff.
• “A bit better”:  This is not a get-rich-quick scheme, it is a way to consider other sensible investments.

That being said, it is reasonable to consider what you would choose if you want to reach a bit beyond index funds.

A sensible place to look is to use Morningstar’s rating system.  They rate all mutual funds from one to five stars.  The worst 10% of all funds rank one star, 22.5% rank two stars, 35% rank three stars, 22.5% four stars, and the best 10% rank five stars.  The funds are grouped by category (e.g. US Large Cap) and adjusted for risk. Continue Reading »

Asset allocation is perhaps the most important consideration when designing an investment portfolio.  Selecting an appropriate mix of stocks, bonds, and cash and maintaining the proportions through regular rebalancing, is about as sure-fire a winning strategy as it gets.

And the online financial service firms are there to help, right?  If I just follow the directions on the website, it’ll be easy as pie, right?  Wait a minute, hombre, not so fast.  Let’s compare the offerings of three large online services:  Schwab, Fidelity and Morningstar.

What exactly is “aggressive”?

The first step in selecting an appropriate asset mix is to determine what “investing” style matches your investment time horizon and your tolerance to risk.

If you’re nearing retirement, you want to have a more conservative portfolio than if you’re just starting out.  Workforce newbies have the most to gain from a high-risk-high-gain allocation, and more time to recoup, should the markets sour.  Likewise, if you’re the type who loses sleep when the markets see-saw, you might be more comfortable with a lower volatility portfolio, and accept that you might have to work an extra year — that may be a good trade-off for you.  Each website offers a walk-through questionnaire to help you evaluate where you fit on the spectrum of risk tolerance. Continue Reading »