Last Updated Feb 5, 2010 11:33 AM EST
What kind of investments should I have in my portfolio?
- In case of unanticipated inflation, you want Inflation-Adjusted Treasury Securities (TIPS), gold, or money market mutual funds. Real estate can work too, although very slowly over time. Commodities are wild cards. They often rise during inflationary times, but not always.
- For anticipated (but moderate) inflation and economic growth, you want U.S. and international stocks. You also want stocks during periods of mild disinflation, when consumer price increases are gradually going down. To diversify among U.S. stocks, you need mutual funds dedicated to small companies, large companies, value stocks (low-priced and unloved), and growth stocks (earnings rising rapidly). To diversify among international stocks, you need funds in developed markets such as Europe and Japan and in emerging markets such as Brazil, India, and China.
- In case of economic slowdowns, you want high-quality, noncallable long-term bonds — which means Treasuries.
- If we ever see actual deflation, with price levels falling, you'd want Treasuries too. Stocks can do well during a moderate deflation, depending on what the economy does, but they get creamed during severe deflations.
- To stabilize the value of a portfolio, you want cash equivalents (money market mutual funds, short-term Treasuries) and short- to medium-term bonds.
To prevent weight gain, hair loss, acne, and wrinkles — and to confront an unknown future — you want a stake in all of these investments. The exact mix, however, has to be matched to your personal needs and will change over time.
To keep it simple, you want to own most of these investments through mutual funds.
You have not diversified if you own 15 stocks. It takes a minimum of 50, spread carefully over many different size companies and types of industries, to approach a proper U.S. mix. You have not diversified if you own five growth mutual funds. Those managers all pick the same kinds of stocks and they'll rise or fall in tandem. You have not diversified if you own all stocks or all U.S. mutual funds, even if they're different classes of stocks. Nor have you diversified if you buy a bond fund, a Ginnie Mae fund, and some certificates of deposit. These too are much alike.
At minimum, you need a mix of U.S. stocks, international stocks, and high-quality medium-term bonds. An investor with more money will add emerging market stocks and commodities. Real estate also belongs in the pot. Beyond your own house, consider real estate investment trusts.
Excerpted from Making the Most of Your Money Now by Jane Bryant Quinn
Copyright 1991, 1997, 2009, by Berrybrook Publishing, Inc. Reprinted by permission of Simon & Schuster, IncBuy the Book