Searching for the Perfect Investment - Part 1

Searching for the Perfect Investment - Part 1

[caption id="attachment_437" align="alignleft" width="150"]John G. Finley, CFA John G. Finley, CFA[/caption]

The more I think about it, the more convinced I am that investing is a lot like parenting. We humans must be hard-wired to seek simple solutions to the complex situations that life puts in our paths. If you’re raising small children, you know that nothing elicits a greater range of emotions than being a parent, from shear bliss to utter bewilderment--or worse -- often within the same day, or even hour. Sometimes these dramatic swings can be too much to handle on your own.

Some days, when close to the breaking point, many of us will desperately seek out expert advice and coaching. A recent search on Amazon.com for books on parenting returned over 42,000 titles, and don’t even try to guess the number of parenting blogs that are available.

Parenting Your Portfolio

Like parenting, investing is never simple and it is often just as perplexing, especially in tough economic times. Investors must contend with an endless array of variables, from macroeconomics like high unemployment, historically low interest rates, and slow GDP growth to geopolitical risks (Iran and North Korea). Like being a parent, there is never a time when you can’t think of something to worry about. All of this can take its toll on us emotionally, as well as intellectually. If, by some happenstance, you should suddenly find yourself in a worry-free state, you need only turn on the TV or open the newspaper to restore your proper sense of angst.

Like all responsible parents, investors also have to sort through a staggering number of strategies, tactics and products:

  • Stocks: Domestic, international or emerging markets? Which industries? Healthcare, utilities, consumer goods, tech, or energy. Growth or value? Large, Mid or Small cap?
  • Bonds: Treasuries, corporates, mortgages, municipals, high-yield, and foreign? Long, short or intermediate duration?
  • Alternatives: Hedge funds, real estate, commodities, private equity, MLPs, preferred stocks, derivatives?

Oh, but is doesn’t stop there…Once, you’ve settled upon your investment strategy, you must turn your attention to the proper allocation among these investments. Should you go 60% stocks and 40% bonds? Or should it be 50%/50%? How much international? How much, if any, in alternatives? Which ones? How much in cash?

In Part 2, we will look at why the perfect investment does not exist.

In Part 3, we will discuss the best strategies for making the best investments.

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