Chapter 14 A Life-Cycle Guide to Investing
Basics: age & income & specific responsibilities in life matter in the mix of assets in one’s portfolio.
Five principles to allocate assets:
1. Risk & Reward
Higher risk is the price for more returns
2. Actual risk in stocks & bonds depends on the length of time you hold them – staying power.
The longer time you can hold, the greater should be the share of common stocks.
3. Dollar-cost averaging
- Periodic investments of equal dollar amounts
Drawback: (a). commission fee is high (b). unlikely to provide highest return
4. Rebalancing can help reduce investment risk and increase returns - Bringing the proportions of your assets devoted to different asset classes back…show more content… Rule 2: Never pay more for a stock than can be justified by the firm’s foundation value.
Rule 3: Buy stocks with stories that can attract investors (castle in the air)
Rule 4: Trade as little as possible to avoid transaction fees.
The Substitute-Player Step – hiring a professional Wall St Walker:
- Good: Picking from active mutual-fund managers frees one from having to select stocks and doing paperwork and records for tax purpose.
Bad: difficulty in choosing the investment managers – you cannot depend on an excellent record continuing persistently in the future.
- The Morningstar Mutual-Fund Info. Services
What’s Morningstar? – provides you with the most comprehensive sources of mutual-fund information/also uses a five-star rating system to evaluate, though not always true.
- Mutual-Fund Costs:
1. Leading Fees – front-end load/Back-end loads and exchange fees
2. Expense Charges – Operating and investment management exp./12b-1 charges
*. Mutual-fund asset performance bears no relationship to the exp charged Avoid funds with high turnovers
- The Malkiel Step
Buy highly discounted closed-end funds – even if