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February 16, 2010 at 04:35 AM
The topic this week is how I use stocks in building client portfolios. First let me say that I do not consider myself a stock picker. I learned years ago that trying to forecast the price of an individual issue in the near term is very difficult, if not impossible.
Around 1997, while working for the “Bull,” one of their stock analysts predicted that Compaq would rise to $47 per share from its current level of $37. Not only didn’t it rise, but it proceeded to fall to $27 and then fell into more trouble (as I recall). Similar stories are innumerable. There are a multitude of potential problems in selecting individual stocks, not the least of which is to understand how investors, as a group, will feel about a company’s prospects. You must predict whether they will be buyers, sellers, or neither.
Because human behavior is such a key factor, but is so unpredictable, I prefer to delegate this task to managers of mutual funds and ETFs. I should mention, in case it wasn’t obvious, that I will use the term “stock” in a categorical sense and not as a reference to individual issues.
During the bull market of the 1990s, an aggressive portfolio might have contained 80% or more in stocks. Even a balanced portfolio was 40% to 60% stocks. Since returns cannot be controlled, but risk can (at least to some extent), here’s how I allocate my portfolios (stocks/bonds/cash/alternatives):
o Conservative (16/68/3/13)
o Moderate (35/43/3/19);
