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The web site of Kelly C. Ruggles. Kelly Ruggles, President of American Reliance Group, Inc., is a well known educator and fee-based financial planner. |
Kelly Ruggles is the author of "The Financial Playbook" for Retirement.
Kelly C. Ruggles, Financial Planner and Educator

Articles by Kelly Ruggles        Back to Article Main Page

May, 2007
Lost: One Black Lexus:
Managing Your Portfolio for Long Term Results

A desperate investor placed the following message in the classified section of his local newspaper:  “Lost:  One Black Lexus.  Large reward for the person who can help me find my assets and bring back financial acceleration to my portfolio.”

The basis behind this fictional classified message is one of familiarity.  It is a feeling of anguish many investors have experienced and will likely remember for their lifetime.  Controlled by pessimism, some may look over their financial accomplishments and see nothing but lost hope, forgotten dreams, and depleted retirement savings.  The black Lexus is now lost.

One does not have to go too far back in history to understand the idea behind the message.

With proper planning, when different investments are added to the portfolio, the assets performing above average tend to offset the assets performing poorly. The tendency toward dispassion promotes investment success and understanding the risk associated with each position helps to advance your financial plan.  
The Nasdaq Composite is just one of many indexes representing a portfolio of stocks within the overall market.  It is the largest U.S. electronic market and contains all the stocks that trade on the Nasdaq (National Association of Securities Dealers Automated Quotations).  Best known for its over-weighted technology exposure, it should be noted that the Nasdaq has thousands of member companies representing numerous areas and sectors of the market such as biotechnology, financial services, retail, and transportation.  It is a capitalization-weighted index and tends to be more volatile than other popular indexes. 

In early March of the year 2000, the Nasdaq Composite Index reached a level slightly above five thousand.  Years later, as we approach the halfway point of the year 2005, the same index sits about 58% lower than its historic highs. 

With a cost basis established in March of 2000, a hypothetical investment of $100,000 (tracking the Nasdaq Composite) would now have a loss of $58,000!  There goes a nice new luxury car.  According to Lexus, a Division of Toyota Motor Sales, U.S.A., Inc, the manufacturers suggested retail price (MSRP) starts at $56,875 for the 2005 LS.  With the hypothetical investment in our example, an investor would have a loss equivalent to the cost of a new 2005 LS.

Understanding the reasons behind past losses and focusing on present day specifics accentuates financial planning. 

So, how does an investor avoid this type of disaster?  The answer, of course, depends on the unique goals, risks, and time horizons of each investor, however the following generalized comments may assist all people saving for their financial betterment. 

Investors are encouraged to spend time with their financial advisors.  By doing so, it may assist you in keeping focused.  A dispassionate approach is one of control and composure.  Sometimes, emotions create irrational decisions.  Your advisor brings continuity back to your financial plan.  It is often better to act instead of react.

The process of diligent financial planning generally touches on the following: gathering data, determining goals, analyzing current financial situations, developing the plan, implementing the plan, and monitoring the plan.  Chances are, you were unaware of the stage title in your financial planning process, but your financial advisor was fully aware of each.

Ultimately, a person earns his/her wages and then faces a decision to spend or not to spend.  For various reasons, many people develop a portfolio of assets instead of wasting income on expendable goods and services.   

Once the necessary data of current assets and investments has been gathered, the investor’s goals will assist to determine the necessary allocation and continued management style of the portfolio.  Your unique analysis may include planning for retirement, estate distribution, elderly care, education expenses, and taxation.  Most people have simultaneous goals with different time horizons and priorities.  This is normal and should be factored into your overall plan.

Thus, your goals will likely affect the combination of assets included in your portfolio.  As you analyze your current financial situation, and before you commit your savings to any investment, a complete discussion of the risks and costs involved should take place.

Perhaps few investors understand the real meaning of “risk” until they experience a loss.  Depending on the investor, the definition of “risk” is usually interpreted as “uncertainty” or “damaging.”  For the purposes of this article, investment risk can viewed as the probability of receiving a return less than the anticipated goal.  A higher probability for negative (or positive) returns means greater risk of capital.  Always remember there is a risk/return trade off with every investment you own.  Imprudent portfolio management may destroy net worth values and the investor may lose out on his/her Lexus. 

Here is where diversification is often introduced.  Diversification in any portfolio plays an important role in developing the returns and volatility of the portfolio.  Discussions regarding diversification often revolve around the concept of risk reduction, but it should also introduce the idea of return improvement.  In the modern investment environment, the vast numbers and assortments of investment alternatives tend to overlap one another.  It is still possible to achieve true negative correlations, but in today’s market it is made more difficult due to the array of choices. 

With proper planning, when different investments are added to the portfolio, the assets performing above average tend to offset the assets performing poorly.  After you implement your plan, monitoring it is paramount to its success.  Inevitably, weaknesses and strengths occur and you should note the positions that either achieve their anticipated goals or fall short of their goals.  It is important to manage your portfolio without allowing emotions to micromanage it.

The investor searching for his/her lost Lexus does so in vain.  It will not be returned anytime soon because the investor in this story lost 58% with improper planning.  Now, it will take a 138% gain from the current portfolio value to bring back the original principal amount.  An unprepared investor is a carelessness investor.

The tendency toward dispassion promotes investment success and an understanding of the risk associated with each position helps to advance your financial plan.  An investor should reduce the clutter of inconsequential information to concentrate on the data most appropriate for his/her situation.  Based on your willingness to accept certain risks, a suitable diversification of assets will assist you in reaching your goals.  And once your goals materialize, the pleasures of life become a reality.



©2007, Kelly C. Ruggles | Sitemap | Disclosure
Kelly C. Ruggles, President of American Reliance Group, Inc., is a registered investment advisor. Mr. Ruggles is the author of "The Financial Playbook" for Retirement.

Mr Ruggles does not intend to provide personalized investment advice through this publication and does not represent that the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.