Priming your investment portfolio for the year ahead

For many unsuspecting investors, 2007 was a year in which the conventional wisdom of safety and risk got a sound thrashing.

US homes were supposed to be the safest investments around. Mortgages were bundled as low-risk packages of securities that would provide steady returns for decades. After more than $80 billion of write-offs and a slump in housing prices, those notions were as tainted as the myth of the free lunch.

Although it may sound downright contrarian, focus less on the national or global economy this year and protect your investments by focusing on time and risk.

To reach your goals for prosperity, you will need a postage portfolio. You affix the stamp of risk management on this envelope of mutual and exchange-traded funds to ensure that it gets to a certain place in the future.

First you will need to create a vision of where you want to be and how the housing slump will affect your wealth. The US home market is firmly mired in a decline and may not fully recover for years given that there are about 4.5 million unsold properties on the market, a credit squeeze strangling liquidity and more than 2 million foreclosures looming.

The US Congress and the Federal Reserve are moving to ensure the housing meltdown doesn't severely impair the general economy, although it may be too late to avert a recession.

The Conference Board's Index of Leading Economic Indicators fell for the third time in four months in November.

That's the lowest index level in two years and a red flag that the economy is braking, the New York-based research group said in its December 20 report.

If your occupation is tied into sectors of the US economy most hurt by the slowdown, you need to make a quick check of your labor-market risk, or the chance you will be unemployed soon. All the macroeconomic surveys in the world won't answer that for you.

Stop worrying about the housing market - unless you need to sell your property soon or will be relocating.

Need to hedge your property investments in the long term? Buy international stocks or real estate investment trust exchange-traded funds. The Vanguard REIT ETF is a broad-based portfolio that invests in commercial properties across the United States.

Want a buffer against inflation and mortgage-rate risk while owning property? The simplest way is through a fixed-rate mortgage or Treasury Inflation-Protected Securities, or TIPS, such as the SPDR Barclays Capital TIPS ETF.

As you shouldn't be overinvested in real estate, so it goes for US stocks. A recession will definitely trim corporate earnings, so it pays to look abroad for growth.

"Diversify globally", says Larry Swedroe, author of the book Wise Investing Made Simple.

"At least 50 percent of your portfolio should be in international stocks."

In 2006, I suggested a "nano" plan of core holdings. This is a boilerplate that's a starting point for anyone wanting to diversify, including Vanguard Total Stock Market Index VIPERS, Vanguard Total International Stock Index, iShares Lehman TIPS and iShares Lehman Aggregate Bond Fund.

Your postage-stamp portfolio isn't complete until you customize the percentage of contributions allocated to each fund. You also may add real estate investment trusts and commodity funds for even more diversification.

Do you have a master plan for your financial future? A good document is an investment policy statement that puts down your goals on paper. Then rebalance if your allocations get out of whack.

Are you seeking long-term growth? Stable income? A mixture of both? Write down your objectives and stick to them.

If you are decades away from retirement, for example, ratchet up your stock allocation. Those closer to retirement can increase holdings of bonds and TIPS.

No matter what your occupational or income outlook, it's always a good idea to have at least three months' worth of salary tucked away in a money-market fund or certificate of deposit for emergencies. Also make sure you have enough disability income and life insurance.

As with any investment decision, you will be tempted to go for a big gain in a single stock such as your employer's. Resist the urge. If you ignore overconcentration risk, the check won't be in the mail when you need it most.

John F. Wasik is a Bloomberg News columnist. The opinions expressed are his own.

(China Daily 01/02/2008 page16)