The Perfect Portfolio

The Perfect Portfolio

A twelve-step program to get your investments to meet goals

Deciding to invest for your future is the easy part. Picking the right mix of stocks, bonds and short-term money market accounts is more taxing. Fidelity investments, the huge mutual fund company based in Boston, has come up with a simple quiz to help you find that mix. Called FundMatch, the test asks 12 questions about your finances, your needs for the future, and how aggressive an investor you are. The total will suggest the mix of stocks, bonds and short-term instruments right for you. Note that the test is designed for those who plan to invest for more than two years. Fidelity suggests you consider only short-term bond or money market funds, regardless of your store.

1. What portion of your total “investable assets” – the dollar amount of the investments you currently have – will this investment represent? The percentage of your portfolio that this investment represents can make a difference in how conservative or aggressive you may want to be. Do not include your home or vacation house in calculating investable assets.

Answers and points

Less than 25% – 6

25% to 50% – 7

51% to 75% – 3

More than 75% – 2.

2. Which one of the following describes your expected future earnings over the next five years? Assume inflation will average 4 percent. If you are expecting significant earnings increases, you may want to invest more aggressively.

I expect my earnings will far outplace inflation (due to promotions or a new job) – 5

I expect my earnings increases to stay somewhat ahead of inflation – 3

I expect my earnings to keep pace with inflation – 2

I expect my earnings to decrease (due to retirement, part-time work, or some other reason) – 1

Perfect Portfolio. Photo by Elena

3. Approximately what portion of your monthly take-home income goes toward paying off installment debt, such as auto loans, credit cards, etc., but not including a home mortgage? If a large portion of your income goes toward paying debt, you may want to have cash available for emergencies.

Less than 10% – 8

10% to 25% – 6

25% to 50% – 3

More than 50% – 1

4. How many dependants do you have? Include children and parents you support. If you have ongoing family obligations, you may need to be more conservative.

None – 4

1 – 3

2 or 3 – 2

More than 3 – 1

5. Do you have an emergency fund, that is, savings from three to six months’ after-tax income? Such a fund helps protect against the unexpected, such as a job loss. Without this reserve t tap, you may want to invest more conservatively.

No – 2

Yes, but less than six months or after tax income – 6

Yes, I have an adequate emergency fund – 8

6. Do you have a separate savings plan to cover major expenses, such as college tuition, home down-payment, repairs, etc.?

Yes, I have a separate savings plan for these expenses – 8

I do not expect to have any such expenses – 6

I intend to withdraw a portion of this new investment for these expenses (answer question 12 accordingly) – 5

I have no separate savings plan for these expenses – 2

7. Have you ever invested in individual bonds or bond mutual fund? How comfortable you are with different risks can help you determine how aggressive or conservative you want to be.

No, I would be uncomfortable with the risk – 1

No, but I would be comfortable with the risk – 9

Yes, but I was uncomfortable with the risk – 2

Yes, and I felt comfortable with the risk – 10

8. Have you ever invested in individual stocks or stock mutual funds?

No, I would be uncomfortable with the risk – 1

No, but I would be comfortable with the risk – 15

Yes, but I was uncomfortable with the risk – 3

Yes, and I felt comfortable with the risk – 16

9. Which one of the following statements describes your feelings toward choosing and investment? You should balance the comfort level you choose with your desire to attain your investment goals.

I would only select investments that have a low degree of risk associated with them (i.e., it is unlikely I will lose my original investment) – 2

I prefer to select a mix of investments with emphasis on those with a low degree of risk and a small portion of others that have a higher degree of risk that may yield greater returns – 5

I prefer to select a balanced mix of investments – some that have a low degree of risk, other that have a higher degree of risk that may yield greater returns – 9

I prefer to select an aggressive mix of investments – some that have a low degree of risk, but with emphasis on others that have a higher degree of risk that may yield greater returns – 12

I would only select an investment that has a higher degree of risk and a potential of higher returns – 16

10. You could increase your chances of improving your returns by taking more risk, would you:

Be willing to take a lot more risk with all your money – 16

By willing to take a lot more risk with some of your money – 12

By willing to take a little more risk with all your money – 10

By willing to take a little more risk with some of your money – 5

Be unlikely to take much more risk – 2

11. How long can you tie up this money? Your time frame is critical to your investment strategy. Stocks outperform bonds and short-term investments over long periods. The longer your money can sit and take advantage of market cycles, the more aggressive you may want to be. In approximately how many years do you expect to need the money you are investing?

2-3 years – 5

4 – 6 years – 25

7 – 10 years – 40

10 – 15 years 45

More than 15 years – 50

12. Do you expect to withdraw more than one-third of the money within 10 years? (For a home purchase, college tuition, or other major need?)

No – 50 (If yes, when do you expect to withdraw from the account?

Within 3 years – 5

4 -6 years – 30

7 – 10 years 50

Total score for all 12 questions:

Score: 0 – 75, Capital preservation portfolio. Short term – 50%, bonds – 30%, stocks – 20%.

Score: 76 – 132, Moderate portfolio. Short-term – 20%. Bonds – 40%. Stocks – 40%.

Score: 133 – 179, Wealth-building portfolio. Short-term – 5%. Bonds – 30%. Stocks – 65%.

Score: 180 or more, Aggressive growth portfolio. Stocks – 100%