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Describe the Phases of Successful Investing

Strategies for developing investment portfolios differ among individual portfolio managers and institutions. The strategy each investor prefers depends on the way he or she views the market; an investor’s strategy also depends on his or her goals, budget, and experience in investing. It is impossible to discuss the strategies that every portfolio manager uses to build each portfolio; however, as I have reviewed successful portfolios, I have found that several critical phases of investment remain the same (see Chart 24.1). In an earlier section, you saw the top of the investment hourglass: this hourglass details the steps you should take before you begin investing. Like the way we live our lives and decide on our goals, the way we invest should be based on our priorities. This section includes the bottom of the investment hourglass: a pattern of successful portfolios that I have seen in my experience.


Chart 24.1: The Investment Hourglass Bottom

The bottom of the investment hourglass is divided into four levels, representing the phases of investment. The first level of the hourglass represents the phase in which you develop your emergency fund and food storage. The second level represents the phase in which you develop your portfolio’s core, which includes broad market index funds or core mutual funds. The third level represents the phase in which you diversify your portfolio by broadening and deepening your asset classes. Finally, the fourth level represents the phase in which you develop your opportunistic assets, such as individual stocks and sector funds.

Levels two, three, and four are also divided in terms of taxable assets and retirement assets. Taxable assets are assets that you will need to pay taxes on the earnings each year. Retirement assets are assets that you will not need until after you retire and on which you do not pay taxes until you take the money out at retirement. The breakdown of your assets between your taxable and retirement accounts will depend on your personal goals and your available retirement vehicles.

The bottom of the investment hourglass illustrates three important principles. First, it illustrates the importance of keeping risk in perspective. The base of the hourglass encompasses the least risky investments. As you move up the hourglass, you take on higher risk and, hopefully, higher returns. Second, the hourglass teaches you the “how to” of investing. You should invest in lower-risk assets first and then expand your portfolio to increase its potential for greater risk and more return as the size of your assets increases. Third, the investment hourglass separates taxable assets and retirement assets. The impact that taxes have on these two types of accounts is not the same, so retirement and taxable assets should be managed differently. The following is a more detailed discussion of each phase of successful investing.


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