The Key to Building a Top-Performing Investment Portfolio
by Sidney J. Ruth, Certified Public Accountant and Financial Advisor*

If you want to build a top-performing investment portfolio, you should start by hunting for the top-performing stocks, mutual funds, or investment managers, right? Wrong.

Too many investors are too eager to find top-notch funds and managers, without first deciding on an overall portfolio strategy. The result? These investors wind up with a hodge-podge of investments that don’t add up to a decent portfolio. Their effort might be better spent by concentrating on the allocation of their funds among the different asset classes.

The What and Why of Asset Allocation
Asset allocation refers to dividing your portfolio among major asset categories, such as stocks, bonds, and cash equivalents, in order to reduce risk by diversifying your portfolio. Research has verified the importance of asset allocation. A landmark study by leading investment analysts Brinson, Singer, and Beebower showed that more than 91 percent of the time, the most important factor in determining investment results was the way portfolio assets were allocated among the asset categories. The selection of individual securities, funds, or fund managers was a significant factor only 4.6 percent of the time. Market timing and all other factors combined were a factor less than 3 percent of the time.

Allocation and Diversification
The terms asset allocation and diversification are commonly confused. While asset allocation refers to different asset classes, such as stocks, bonds, and cash, diversification refers to the process of further dividing your investment dollars within each of these asset classes. For instance, within the stock category, you would want to include a certain percentage of large, mid-size, and small company stocks to properly balance your portfolio. Allocating a portion of your investments in each asset class to appropriate sub-categories can further reduce risk and enhance return.

Proper Allocation
How you allocate your assets depends on a number of factors including your financial goals, age, tolerance for risk, income needs, and even your tax situation. As you move through different stages in life, your best asset allocation strategy is likely to evolve.

By developing a successful asset allocation policy and monitoring it carefully, you can reduce portfolio risk and improve the overall return of your portfolio over time.

Come in or call FIFS today at 800-332-4141 to evaluate and implement the proper asset allocation strategy for your investment portfolio.

*Investment advisor representative of Investment Advisors, a registered investment advisor and a division of ProEquities, Inc. • Securities offered through ProEquities, Inc., a registered broker-dealer. Member NASD and SIPC. 1110 North Main Street, Goshen, IN 46528. 574-533-9511. Franconia Insurance & Financial Services is independent from ProEquities, Inc.

FIFS Connection, Spring 2005, Vol.2, No. 2