The Perfect Portfolio E-Book

Leland B. Hevner

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 495

Veröffentlichungsjahr: 2009

Beschreibung

Today's world of personal investing is not a friendly place. Individuals are assaulted with an unending barrage of financial news, "expert" advice, investing tools, trading systems, and more, to the point where they are overwhelmed. As a result, most people simply entrust their portfolios to third-party advisers and, in doing so, lose control of their financial security. Nobody is more familiar with this situation than author Leland Hevner. As President of the National Association of Online Investors (naoi.org) and a longtime educator in this field, he understands that to succeed in today's chaotic markets you don't need more news, advice, or analysis tools. Instead, you need a completely new and simpler approach to building an effective portfolio on your own--one that includes updated investing concepts and dramatically new ways of looking at the market. That's why he created The Perfect Portfolio. Written in a straightforward and accessible style, this reliable resource shows you, step by step, how to use a revolutionary approach to investing called the Perfect Portfolio Methodology (PPM). Developed by Hevner over the course of his successful career and based on input from hundreds of individual investors, the PPM allows you to capture incredible returns under any market condition without exposing yourself to unacceptable risk or requiring you to devote an extraordinary amount of time to the investing process. The journey to creating your unique Perfect Portfolio is divided into three parts: * Part I reveals the problems faced by today's investors, outlines a new approach for solving them, and gets you started by showing how to design the Core Segment--or foundation--of your Perfect Portfolio * Part II details how to "supercharge" your Perfect Portfolio's returns by adding a Target Market Segment consisting of five newly defined asset classes * Part III illustrates how you can bring the Core and Target Market Segments together to form a Perfect Portfolio that meets your unique investing profile and current market conditions This is a book that financial advisers will not want you to read. Why? Because it takes them out of the loop by empowering you to make informed and profitable investing decisions on your own. The Perfect Portfolio places the power to control your wealth firmly in your hands, where it belongs. The Perfect Portfolio is more than just a book. It also includes a supplemental online component you can access via the Web at www.perfectportfoliobook.com. The use of this resource is not required to take full advantage of the book's content, but the information and tools presented in the online component can enhance your overall learning experience.

Leseprobe

Table of Contents

Title Page

Copyright Page

Epigraph

Foreword

Preface

The New Face of Investing Today

A New Approach to Investing

Why Should You Complete This Book?

How Is This Book Organized?

A Prerequisite for Continuing: An Open Mind

Author’s Note

The Perfect Portfolio Online Supplement

Accessing the Online Supplement

Benefits of the Online Supplement

Acknowledgements

PART I - THE PROBLEM, THE SOLUTION, AND GETTING STARTED

CHAPTER 1 - The Woeful State of Personal Investing and the Need for Change

The Current State of Personal Investing

Questions from the Classroom

A Troubling and Unacceptable Environment

The Need for and the Nature of Change

Goals of a New Approach to Investing

Enablers of the New Approach

Chapter Summary

CHAPTER 2 - The Perfect Portfolio Methodology

The Genesis of a New Approach

Defining New Asset Classes

Defining Portfolio Building Blocks

Defining a Portfolio Structure

Understanding Your Investing Profile

Configuring the Portfolio to Meet Your Profile

Meeting Our Goals for a New Approach

Chapter Summary

CHAPTER 3 - Building Your Portfolio’s Core Segment

The Purpose of the Core Segment

Characteristics of the Core Segment

The Core Segment Building Blocks

The Core Investment Selection Process

The Cash Building Block

The Bond Building Block

The U.S. Stock Building Block

The Foreign Stock Building Block

The Sample Core Portfolio Segment

A Sample Core Segment Design

Chapter Summary

PART II - SUPERCHARGING YOUR PORTFOLIO WITH TARGET MARKET INVESTING

CHAPTER 4 - Building Your Portfolio’s Target Market Segment

The Purpose and Characteristics of the Target Market Segment

The Target Market Segment Building Blocks

The Target Market Investment Selection Process

Target Market Allocations

Risk Management for the Target Market Segment

Elements and Tools for Implementing a Trading Plan

How to Determine Trading Plan Target Prices

A Sample Trading Plan

Risk Management Summary

Betting Against an Asset Type

Chapter Summary

CHAPTER 5 - Adding Gold to Your Portfolio

Step 1: Understanding Gold

Step 2: Identifying Gold Investment Candidates

Step 3: Collecting and Analyzing the Data

Step 4: Price Chart Analysis

Step 5: Defining a Gold Investment Trading Plan

Chapter Summary

CHAPTER 6 - Adding an Energy Component to Your Portfolio

Step 1: Understanding Energy

Step 2: Identifying Oil-Related Energy Investment Candidates

Step 3: Collecting and Analyzing the Data

Step 4: Price Chart Analysis

Step 5: Defining an Energy Investment Trading Plan

Considering Alternative Energy

Chapter Summary

CHAPTER 7 - Adding Agricultural Commodities to Your Portfolio

Step 1: Understanding Agricultural Commodities

Step 2: Identifying Agricultural Commodity Investment Candidates

Step 3: Collecting and Analyzing Data

Step 4: Price Chart Analysis

Step 5: Defining an Agricultural Commodities Trading Plan

Chapter Summary

CHAPTER 8 - Adding A Real Estate Component to Your Portfolio

Step 1: Understanding Real Estate Investing

Step 2: Identifying Real Estate Investment Candidates

Step 3: Collecting and Analyzing Data

Step 4: Price Chart Analysis

Step 5: Making A Decision

Chapter Summary

CHAPTER 9 - Adding Emerging Market Stocks to Your Portfolio

Step 1: Understanding Emerging Markets

Step 2: Identifying Emerging Market Investment Candidates

Step 3: Collecting and Analyzing Data

Step 4: Price Chart Analysis

Step 5: Purchase Decision and Defining a Trading Plan

Chapter Summary

PART III - CREATING AND WORKING WITH YOUR PERFECT PORTFOLIO

CHAPTER 10 - Designing Your Perfect Portfolio

Defining Your Investing Plan

Beginning the Perfect Portfolio Design Process

The Portfolio Design Worksheet and Calculator

Designing a Perfect Portfolio

Defining Perfect Portfolio Allocations

The Final Perfect Portfolio Design

Chapter Summary

CHAPTER 11 - Implementing, Monitoring, and Managing Your Perfect Portfolio

Implementing Your Portfolio

Monitoring Your Portfolio: Reacting to Triggers and Alerts

Managing Your Portfolio Using Online Resources

Your Portfolio Implementation and Management Action Checklist

Chapter Summary

CHAPTER 12 - Maximizing the Potential of Your Perfect Portfolio

Selecting Investments

Expanding Your Awareness of the Market

Enhancing Your Trading Plan Skills

Creating Additional PPM Building Blocks

Adding Doomsday Building Blocks

What about Adding Individual Stocks?

Monitoring and Trading Your CORE Segment

Learning from Experience

Chapter Summary

The Perfect Portfolio Summary

Appendix - A SAMPLE PPM BUILDING BLOCK TRADING PLAN

About the Author

Index

Copyright © 2009 by Leland B. Hevner. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:Hevner, Leland B., 1952-

The perfect portfolio : a revolutionary approach to personal investing / Leland B. Hevner. p. cm. Includes bibliographical references and index.

eISBN : 978-0-470-45672-9

1. Investments. 2. Portfolio management. 3. Finance, Personal. I. Title. HG4521.H557 2009 332.6—dc22 2008040638

“Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it and live up to it.”

Buddha (Hindu Prince Gautama Siddharta, the founder of Buddhism, 563-483 B.C.)

Foreword

I first met Leland Hevner in 2002 at my former job as a Wall Street Journal reporter for CNBC. I interviewed Leland for a televised investor education segment, and soon found myself calling him frequently for interviews because his advice was always both insightful and immensely practical. Most of all, Leland was a welcome addition to the discussion because he was an advocate for Main Street, not Wall Street. His goal in these interviews was to translate the investing topics being discussed into plain English and to make them relevant to the average person with money to invest.

When I wrote my first book, Investing Success, published in 2004, I again drew upon Leland’s wisdom to explain common investing mistakes that people make—and how they could fix or avoid those mistakes. As we maintain contact over the years, I have come to appreciate Leland’s dedication to providing individuals with comprehensive, objective, and actionable investing education. The study courses he has created for the National Association of Online Investors are a resource that I often recommend to people when I conduct my own investment workshops and investor empowerment activities.

In The Perfect Portfolio, Leland does more than simply show readers how to navigate the personal investing landscape as it exists today. He goes one step further and boldly advocates making significant changes to this landscape. He challenges the validity and relevance of existing investing concepts such as asset class definition, portfolio design theory, and even the very definition of investing risk. And in doing so he presents new ways of thinking and new methods that make the world of personal investing simpler and less intimidating to individuals seeking to take more personal control of their portfolios.

I applaud the author’s willingness in this book to challenge conventional investing concepts that have been taught by “experts” as indisputable facts for decades. I also applaud his recognition that individuals are truly capable of making their own investing decisions if given the appropriate knowledge, structure, and resources. Readers will undoubtedly appreciate his innovative use of an online supplement that makes The Perfect Portfolio more than just a book but rather a total learning experience.

Today’s markets are rife with challenges that confound novice and professional investors alike. Thankfully, The Perfect Portfolio provides the type of outside-the-box thinking that can enable individual investors to not only cope with these challenges but also to view them as profit making opportunities. I firmly believe that anyone with money to invest will benefit from reading this book. The Perfect Portfolio is an easy-to-follow road map to being a successful investor in up and down markets.

LYNNETTE KHALFANI-COX The Money Coach www.TheMoneyCoach.net

Preface

The investing environment that we, as individual investors, face today is not a friendly place. Equity prices are buffeted by factors that were inconceivable just a few years ago. Yet while markets have changed dramatically, the investing theories, methods, and resources we have available to cope with them have not. We are essentially stuck using twentieth-century tools for dealing with twenty-first-century investing challenges, and these tools no longer work.

The time has come to pause, take a deep breath, and rethink the totality of how we view and interact with equities markets. It is time to recognize that much of what we have been taught about how to invest has become obsolete. To survive and thrive in today’s new investing environment, a completely new approach to personal investing is needed. Providing this new approach is the purpose of this book.

The New Face of Investing Today

In the good old days (not many years ago), investors had a reasonable chance of predicting stock prices by analyzing company financial statements. Not too long ago, we could trust with some degree of confidence what a CEO was saying about the health and earnings potential of his or her company. And most of us can remember a time when news items in the financial media had at least been fact-checked. In other words, in the not too distant past, we had a legitimate chance of being successful investors by doing some good old-fashioned homework using basic equity analysis methods and tools. Unfortunately, those days are gone.

Today, a host of factors influence stock prices that have nothing to do with corporate fundamentals. And these factors are almost impossible for us to analyze using the resources available to us. What are these new factors? Let’s look at just a few.

• The Web. This vehicle of mass communication has changed everything. Some of the effects are good, and some are bad. Among the good effects are that individuals have access to massive amounts of investment-related information, and they can use this input to trade equities from the comfort of their homes. Among the bad effects are that much of the information investors are exposed to on the Web is misleading at best and fraudulent at worst. Anyone can post rumors, opinions, and bogus analysis on the Web that can be made to look like legitimate news. The Web then proliferates these postings with the speed of light, and they are read by millions of people who often place trades without questioning what they read. By creating and spreading misinformation on the Web, anyone with a computer and an Internet connection can cause millions of people to make uninformed trading decisions and in this manner manipulate stock prices easily and cheaply.

• The short attack industry. Short selling is now a major factor that can dramatically influence the price of any stock. In today’s markets, major traders such as hedge funds are making tens of billions of dollars through the practice of borrowing shares of a company stock and immediately selling these shares at current market prices. They hope that the stock price will go down so they can buy back the shares at a lower price, return the borrowed shares, and pocket the price difference. This is called shorting a stock and it is a legal activity. What short attackers do, however, is abuse this activity by orchestrating a massive smear campaign against a stock they have shorted in order to rapidly drive down its price. As a part of this effort, they may spread false rumors about the stock on the Web, create and distribute bogus financial analysis reports, and even influence mainstream media reporters to write negative articles about the company they are shorting. A short attack can destroy the value of a stock, and there is no way for us as individual investors to predict which companies are in the crosshairs.

• Government activism. As I write these words, the government is rampaging through the equities markets like a bull in a china shop. Legislators have voted to inject hundreds of billions of dollars into the financial system without a clear plan for how the money will be spent. This is all in response to a problem that the government itself created by insisting (under threat of prosecution) that banks give home mortgages to people who could not afford them (subprime loans). Anytime the government interferes with the free market, bad things happen; and unfortunately signs currently point to increasing government activism. This is another factor that can dramatically affect stock prices, but that defies analysis using investing tools and analysis techniques currently available to us.

• Speculation. In commodities markets, the activity of speculators has a significant effect on the prices of such assets as gold, oil, and food, all of which are vital to the health of our overall economy. Speculative price swings in these commodities affect the earnings and thus the prices of a full range of stocks. As I write these words, in the past six months the price of a barrel of oil has moved from $80 to $140 and back to $60. Such violent price movements are not totally attributable to factors that can be analyzed, such as supply and demand. Much of this price volatility is due to speculation, and this is yet another factor that cannot be analyzed and quantified with any degree of confidence.

These are only a few examples of stock price influences that we, as individual investors, cannot analyze with the methods and tools we have at our disposal today. Fundamental stock analysis does not and cannot take into account any of the factors discussed above and this is why it is very difficult, if not impossible, for individuals to make informed investing decisions in today’s markets. This is why a comprehensive new approach to investing is desperately needed in today’s new and challenging market environment.

A New Approach to Investing

In the face of these new market dynamics and the inability of existing investing tools to deal with them, what can we do? We have three choices.

One option is to whine, complain, and say that the factors listed earlier, and others like them, are illegal or unfair and that government regulators should step in and make everything right. This course of action and $5 will buy you a cup of coffee. It is not going to happen.

A second option is to develop revised theories, methods, and tools that will enable us to analyze the new market influences such as those just described. But this would be an unbelievably difficult task to accomplish, if it were even possible at all. The new problems that plague the market today simply defy any type of rational analysis. This option is a dead end.

The third choice is to develop an updated, and improved approach to personal investing. This approach would recognize the new factors influencing equity markets and provide an updated set of tools, concepts, and methods for dealing with them.

This third option, consisting of creating a completely new approach to personal investing, is the only viable choice for enabling us to succeed in today’s markets. This is the option presented in The Perfect Portfolio.

Why Should You Complete This Book?

As I write these words soon after the stock market crash of 2008, panic reigns in markets. Stock prices have collapsed based on a number of factors that I have just discussed and others. It is understandable that individual investors don’t know what to do in current chaotic market conditions. What is more interesting to me is that financial advisers and market mavens don’t know what to do, either.

The current market malaise is shining a bright light on the financial services industry. We are discovering that the so-called experts are really no more capable of creating and managing an effective portfolio of investments in today’s new market environment than you are, and that placing absolute trust in financial professionals to manage your investments is a very risky strategy indeed.

What is becoming increasingly clear is that it is up to you to take more personal control of your portfolio in order to protect and grow your wealth. To do so, you must have the knowledge, structure, methods, and tools needed to make effective investing decisions in current markets. By reading The Perfect Portfolio you will gain all of these elements necessary for investing success.

Regaining personal control of your portfolio and becoming empowered to succeed in today’s personal investing environment are two of the many reasons why you should, and must, complete this book.

How Is This Book Organized?

I have taught personal investing at the college level for more than 10 years. During this time, I have created dozens of lesson plans. Input from hundreds of students has shown me the presentation design that is most effective. The organization of this book is based on this feedback.

The Perfect Portfolio is divided into three Parts, each containing several chapters, and a Summary. An overview of how the book content is organized is presented in the following paragraphs.

Part I: The Problem, the Solution, and Getting Started—Chapters 1 to 3. I start in Chapter 1 by illustrating the problems faced by individual investors today. For this purpose, I present actual questions from students in the classes I teach. With the problems defined, I then discuss a comprehensive approach for solving them in Chapter 2. Here I explain the Perfect Portfolio Methodology (PPM). It calls for your portfolio to be divided into two segments, a Core Segment and a Target Market Segment. Chapter 3 shows you how to start building the Perfect Portfolio by designing its Core Segment, which serves as the foundation of your portfolio and sets the stage for the more powerful Target Market Segment.

Part II: Supercharging Your Portfolio with Target Market Investing—Chapters 4 to 9. While the purpose of the Core Segment is to provide stability to your portfolio, the purpose of the Target Market Segment is to supercharge its returns. In Chapter 4, I provide an overview of this Segment and describe the process used for its design. It will contain five Asset Building Blocks: gold, energy, agricultural commodities, real estate, and emerging markets. These are assets that can have annual returns of 20 percent, 30 percent, 40 percent, and higher! I show you how to invest in these assets in a manner that enables you to take advantage of their incredible returns potential without excessive risk. Chapters 5 through 9 then go into significant detail on how to identify, analyze, select, and monitor investments for each Target Market asset type.

Part III: Creating and Working with Your Perfect Portfolio—Chapters 10 to 12. At this point in the book you will have the knowledge, structure, and tools needed to construct a Perfect Portfolio that meets your investing goals, your unique investing profile and current market conditions. Chapter 10 walks you, step by step, through the total portfolio design process. In Chapter 11, I show you how to monitor, manage, and modify your portfolio on an ongoing basis. And in Chapter 12, I show you areas of the PPM where you can strive for even higher returns by becoming more involved in the investing process. The PPM enables you to aim for virtually any level of return that you are willing to work for.

Summary: Reviewing, Teaching, and Experiencing the Perfect Portfolio Methodology. I end The Perfect Portfolio with a review of why I have the audacity to call the PPM approach to investing revolutionary. It is an adjective that I don’t use lightly. Then I discuss the reactions I get from students in my classes when they are first exposed to the PPM. Your reactions will probably be similar. Next I present a real-life story told to me by a student who actually used the PPM to build her own portfolio. I think you will find this story interesting and the perfect way to illustrate the benefits of using the PPM approach to portfolio design. I close by presenting a final note that asks you to step back and review what you have just learned in The Perfect Portfolio and to consider how this knowledge can enable you to become a confident and successful individual investor in markets as they exist today and as they will exist in the future.

A Prerequisite for Continuing: An Open Mind

Many students enter the classrooms where I teach the Perfect Portfolio Methodology (PPM) with a host of preconceptions. They believe that they are about to learn how to find and analyze stocks, dissect mutual funds and fund styles, build portfolios with three asset classes, and be shown why buy-and-hold is the preferred investing strategy. Who can blame them? For years they have been taught that these activities form the very foundation of effective personal investing.

As my classes begin, therefore, they are literally stunned when I kick to the curb much of conventional investing “wisdom” and replace it with a dramatically different and simpler method for designing a powerful portfolio. They are, at first, skeptical when I teach none of the traditional investing activities they thought they were about to learn. But as classes progress, they see the logic of the PPM and their skepticism gradually turns to excitement. They begin to realize that the investing concepts they have been taught for years have been stifling their ability to become effective investors and that there exists a far better and more logical way for growing their wealth.

It is therefore appropriate for me to give to you the same advice that I give to my new students. Before starting this book, clear your mind of any preconceptions you may now have about how personal investing works. Forget much of what you have been taught for years. Start with a clean slate. In the PPM, you are about to learn an approach to investing that enables you to view the world of personal investing from a totally different angle, one that defies tradition. You will need an open mind to appreciate and absorb this paradigm shift. Allow yourself the freedom to consider and accept change.

Author’s Note

The logistics of publishing dictate that the content of a book be completed months before the release date. When dealing with a topic as dynamic as equities markets, this can pose a challenge. In the pages of this book, I walk you through a detailed explanation of a revolutionary approach to investing that I call the Perfect Portfolio Methodology (PPM). To illustrate how to implement this new approach, I have used price charts for various market sectors and asset classes as they existed in July of 2008, when I created the content. At that time stock markets were trending down but not dramatically, and certain market sectors were moving up strongly—as you will see in the example charts presented.

Alas, as I write this note in December of 2008, market conditions have significantly changed. Stocks, both domestic and international, have suffered a significant setback, and sectors/asset types that were moving up when I created the examples in this book have tumbled.

In light of the new market environment that may exist when you read this book, you may be tempted to think that the portfolio creation methodology illustrated here is no longer valid.

Nothing could be further from the truth.

In the time between when I created the illustrations used in the content of this book and now, the PPM has worked perfectly for a portfolio I am managing. As markets began deteriorating, it guided me to decrease my portfolio allocation to stocks, both foreign and domestic, and it also completely eliminated from my portfolio investments in energy, agricultural commodities, and emerging markets. At the same time, the PPM directed me to increase my allocations to cash and gold.

The PPM also enabled me actually to earn significant returns using “short” Exchange Traded Funds for various asset types as they began falling in price. These are investment vehicles that go up in value in direct proportion to the decrease in value of the underlying asset or market index. You will learn how to use them in this book.

Thus, while many investors were being advised to buy-and-hold during the 2008 crash and were losing their collective shirts by so doing, the PPM was automatically moving a portion of my portfolio into an extremely defensive stance with a substantial cash allocation, positioning it perfectly for reentry into equities at the first signs of market recovery. At the same time, another portion of my portfolio was earning returns of 20 percent and higher by taking carefully monitored short positions on the S&P 500 index and specific asset classes as they rapidly declined.

So, as you move through this book you may see positive charts for investments that have since been decimated. Don’t worry; the PPM principles you will learn are sufficiently flexible to handle any set of market conditions, not just those illustrated in this book. The performance of my own portfolio is proof of this fact.

Market conditions will change. A good portfolio design methodology recognizes and takes advantage of these changes and that is exactly what the Perfect Portfolio Methodology has done for my portfolio. The PPM has proved to be relevant and effective before, during, and after that market crash of 2008. And it will be just as relevant and effective when you read this book, regardless of current market conditions.

—LELAND B. HEVNER December 1, 2008

The Perfect Portfolio Online Supplement

The Perfect Portfolio is more than simply a book. It also includes a supplemental component that you access on the Web. The use of this supplement is not required, yet I encourage you to do so to take full advantage of a richer and more convenient learning experience.

Throughout the book, I will alert you to instances where you will benefit from accessing an online resource found in the supplement.

Accessing the Online Supplement

To access the online supplement enter the following Web address: www.perfectportfoliobook.com

This entry takes you to a page on the site of the National Association of Online Investors (NAOI), the organization that hosts the supplement. The Web page will display the URL www.naoi.org/members/pportlogin.asp. Don’t worry, this is not an error. I have set up the Web address presented above to point to the supplement home page simply because it is easier to remember.

On The Perfect Portfolio supplement’s sign-in page, you will be prompted for a User ID and Password. Simply enter the following for each:

• User ID: Perfect

• Password: Portfolio

Neither of these entries is case sensitive. After logging in, a Home Page will display with these selections:

• Links by Chapter. When you click on this link, you will be taken to a page that displays the book’s Table of Contents. Clicking on a Chapter link shows you a list of links for the resources that are referenced in the corresponding chapter in this book. Clicking on a link in this list takes you to a resource that can be a worksheet, a calculator, or a third-party Web site.

• Calculators and Worksheets. Click on this link to access an area of the site where I have collected all of the calculators and worksheets referenced in this book. They are presented here, all in one place, for your convenience so you do not have to remember in which specific chapter a resource of interest is referenced.

• Web Link Compilation. When you click on this link you will access a list of all of the third-party Web sites that I have referenced throughout this book. They are listed here, all in one place, for your convenient access.

Benefits of the Online Supplement

The following is a description of the resources and benefits that you will find in the online supplement.

• Worksheets: At various stages of this book, I will suggest that you go to the Web and collect data. For this purpose, you will use specially designed data collection worksheets. You can easily create these worksheets on your own or, for greater convenience, you can access each in the form of a PDF file found in the online supplement and print it.

• Calculators: At various points in this book, I show the use of calculators for purposes such as determining the expected returns for various portfolio configurations. These are easy calculations that you can do with your own calculator. A more convenient method, however, is to simply access the online calculators in the supplement.

• Expanded Information and Education: This book covers a lot of ground, and if I discussed every topic in detail, it would be over a thousand pages in length. I therefore provide Web sites in the online supplement where you can find more detailed discussions of specific topics. For example, while I discuss in this book the definition of Exchange Traded Funds (ETFs) and how they are used, you may wish to learn more about them. For this purpose, I provide one or more Web links in the online supplement where you can go to get additional information on ETFs.

• Updated Web References: Anytime a hardcopy book lists a Web site address, there is a danger that by the time you read the material, the link is out of date. To guard against this, the online supplement contains Web references that are constantly updated. If a Web site mentioned in this book seems to be no longer valid or doesn’t work as described, you can go to the supplement to get updated information.

• Third Party Tools and Resources: Everything you need to design, implement, and monitor your unique Perfect Portfolio is presented in this book. The techniques and the tools are easy to understand and simple to use. However, there exist Web-based tools and resources that you may wish to consider to assist you at various steps of the portfolio development process. You will find a list of these resources in the supplement. Keep in mind that these resources are presented only for your consideration and are not a requirement for you to develop your Perfect Portfolio.

It is important to repeat that use of the supplemental online component is optional. It exists for your convenience only. Having said this, I truly believe that a book combined with a closely integrated online component is the future of all financial publications. The Perfect Portfolio is at the vanguard of this exciting and inevitable new trend in financial publishing.

Acknowledgments

The inspiration and knowledge required to create a truly effective book on personal investing cannot come from the secretive back-rooms of Wall Street insiders, the brightly lit stages of TV pundits/ celebrities, or the sterile halls of academia.

No, a book that has the potential to instill widespread confidence among the investing public can only originate from the people it is designed to help—namely, the average person with money to invest.

The Perfect Portfolio was created based in large part on my interaction with individual investors. Fortunately, I have access to a host of them through the personal investing classes I teach and via the multi-thousand-member organization I run, the National Association of Online Investors.

In writing this book, I spent countless hours interviewing people who are faced every day with investing decisions that they are not prepared to make and with financial offerings that they are not prepared to evaluate. They told me of the challenges they encounter as they try to navigate the chaotic world of personal investing in an effort to protect and grow their wealth. They expressed to me their feelings of frustration, despair, and even anger as they watched their savings melt away in portfolios designed by credentialed advisors. And they told me that they would be willing, in fact eager, to become more involved in the investing process if they only knew how.

The almost universal desire of people to cut the cord of dependency on the financial services industry and to regain personal control of their investments, and thus their quality of life, inspired me to create The Perfect Portfolio.

I would like to acknowledge the great debt of gratitude that I owe to the many, many people who were willing to share with me their personal investing stories along with suggestions on how their investing lives could be made better. In essence, they told me what to write in this book.

I also wish to thank Ms. Rachelle Cohen, a superb editor and a tremendously supportive friend for her valuable assistance in reviewing the content of this book.

PART I

THE PROBLEM, THE SOLUTION, AND GETTING STARTED

Our journey toward creating the Perfect Portfolio is divided into three Parts as briefly described in the Preface to this book. Part I consists of three chapters.

I start in Chapter 1 with a description of the problems that face individual investors on a daily basis. I illustrate these problems with discussions I have had with students in the college classes I teach.

With the problem defined, I then lay out in Chapter 2 a solution to these problems using a revolutionary new approach to investing that I call the Perfect Portfolio Methodology, or PPM for short.

We begin in Chapter 3 the process of creating a Perfect Portfolio by building its Core Segment, consisting of the traditional asset classes of Cash, Stocks, and Bonds.

After completing Part I of The Perfect Portfolio, you will understand the problems that need to be solved, you will understand the new approach to personal investing I am proposing for addressing these problems, and you will know how to build the foundation of the Perfect Portfolio in the form of its Core Segment.

Then in Part II of The Perfect Portfolio, you will learn how to supercharge the portfolio’s returns potential by adding a Target Market Segment consisting of five new asset classes that I have defined for this approach.

And finally, in Part III, we bring the Core Segment and the Target Market Segment together to form a Perfect Portfolio that meets your unique goals, matches your personal investing style, and works in current market conditions.

CHAPTER 1

The Woeful State of Personal Investing and the Need for Change

A VIEW FROM MAIN STREET

As I fiddle with the overhead projector at the front of the room, people start to file in for the first session of an investing class that I teach at Montgomery College just outside of Washington, D.C. They find their seats, and as I turn to face the group of about 20 people, I see a cross-section of the U.S. public. Most are older and probably retired. Many are middle-aged and in their peak earning years. There are a surprising number of younger people who look like they are fresh out of college and just starting their earning careers. And, as usual, there are more women than men.

I know that these students are not day traders and few, if any, are experienced personal investors. These are average people with money to invest and they simply don’t know how to navigate the world of personal investing. I note that many have brought folders with them that I suspect contain broker statements they do not understand. At some point, either before or after class, they will spread these statements in front of me hoping that I will be able to decode them.

The overwhelming majority of people who attend my classes have off-loaded their portfolios, some of which are quite substantial, to advisers and brokers because they have no confidence in their own ability to make investing decisions. But as they have watched their portfolios stagnate or erode while being charged significant fees, these individuals have reached a breaking point. They have had enough of standing on the sidelines and watching their hard-earned savings fade away without understanding how or why. They want to understand and have more personal control of their portfolios, either by making their own investing decisions or at least being able to challenge their adviser’s recommendations, but they don’t know how. They have found their way to my class hoping against hope that it will be their first step toward becoming a more confident and independent investor.

Yet, students enter the class skeptical. Many believe they are about to hear a sales pitch from a broker or a financial adviser. They have experienced this many times before and are fully prepared to be disappointed if it happens again. Others believe they are about to learn new ways to pick stocks and mutual funds based on an incredibly successful trading system I am promoting. Still others believe I will be trying to persuade them to buy specific stocks or funds on which I receive commissions.

Therefore, my students are typically surprised when I tell them that I am not selling anything, that I am not going to give them specific investment recommendations, and that I will not reveal to them a shortcut to investing riches.

I tell them that I am a professional educator, not a professional salesman, and that what I am about to teach in this class is nothing short of a totally new approach to personal investing. They look at me with surprise when I tell them that this new approach will require that they forget most of what they have learned about investing to this point. I tell them that the only prerequisite to taking this class is that they clear their minds and be open to new investing methods that most of their advisers or brokers will look upon with the utmost of disdain. I tell them that what they learn over the next 12 hours of class work will enable even the least experienced among them to become confident, independent and successful investors. At this point, while many facial expressions show disbelief, I at least have their attention.

What I teach my students in the classroom is what I will teach you in this book. I therefore give you the same advice that I give to my students. Clear your mind of preconceived notions of how personal investing works. Open your mind to new ideas. Don’t compare what you read here to what you have read or been told elsewhere until you finish the book. Then decide if this new approach makes sense for you.

You are now a student of a radically new way of investing that takes the power out of the hands of salespeople and third party “experts” and puts it squarely into yours. By picking up The Perfect Portfolio you have shown that you are ready, willing, and able to accept the challenge.

The Current State of Personal Investing

Why is a new approach to investing needed? The answer is, unfortunately, because the world of personal investing today is broken. The financial services industry is not meeting the needs of people who are seeking to learn how to take more personal control of their portfolios. As a result, the investing public wants, needs, and demands change.

In my position as a teacher of personal investing and as President of the multi-thousand-member National Association of Online Investors (NAOI), I have the opportunity to interact with the investing public on a daily basis. I talk with hundreds of individual investors every year. I can see in their faces and hear in their voices that they are confused and often intimidated by the world of personal investing as it currently exists. When seeking to learn how to cope with this world, they are confronted with hundreds of investing books, countless newsletters, nonstop seminars for trading systems promising instant success, sales pitches from hoards of financial advisers, and a constant barrage of information from the financial media. The world of personal investing today is simply overwhelming for the average person trying to protect and grow their savings.

When confronted with this chaos, most people simply give up in despair and give their portfolios to financial advisers to manage. In essence, they are entrusting their financial futures to strangers who are far too often salespeople with fancy financial credentials. This situation is clearly unacceptable. But what can we do? What can we change?

I realized early in my teaching career that people did not simply need more investing tools, more information, or more expert financial advice. Rather, the public told me that they needed nothing less than a totally new approach to investing. They wanted a greatly simplified approach that would enable them to take more personal control of their portfolios and to effectively manage their investments on their own with confidence. To meet this goal, I developed the revolutionary Perfect Portfolio Methodology (PPM) approach to investing which I explain in this book.

The PPM greatly simplifies the investing process. It shows you how to create an incredibly powerful portfolio using only nine key Asset Building Blocks. It frees you from the tedious process of analyzing individual stocks and mutual fund styles. And it gives you a logical structure for designing a portfolio that meets your unique needs and is responsive to changing market conditions. In short, it fixes what is broken in today’s personal investing market.

But before presenting a solution, it is beneficial to understand the problem the solution is designed to address. The purpose of the next section of this chapter is to shine a bright light on the obstacles that individual investors face today. In doing so, I hope to convince you that a new approach to personal investing is needed. I also show in this first chapter that a new approach is possible and what it will look like.

I begin by illustrating the problems faced by average people with money to invest using the words of students in the personal investing college classes I teach.

Questions from the Classroom

It is 9 P.M. on a blustery March night. I have just finished a three-hour session of my class, titled “Effective Investing Using Online Resources,” at Montgomery College on the outskirts of Washington, D.C. This is one of four weekly sessions that make up the entire program.

While the class is officially over for the night, I know that it is not finished. Students are lining up at my desk to speak to me one on one. Each wants to discuss a personal finance issue that they do not feel comfortable raising during class. Even though it is late, everyone is tired, and they are missing American Idol, they stand patiently, folders in hand, waiting for their turn to engage in a private conversation about their mysterious financial situation.

My students know that I am not a registered financial adviser. I told them at the beginning of the class that I cannot give them specific investment recommendations. But this is not what they are seeking. They simply want to talk to a knowledgeable and objective third party who is not selling anything and whom they feel they can trust. So they wait.

It would not be hard for me to simply list the problems faced by individual investors today. But a sterile list of such items would not do the topic justice. The full scope of the problem is better understood when presented within the context of real-life, human experience. These are experiences that I believe you may be able to identify with on a personal level.

Each of the following questions and related discussions represents a real issue presented to me by a student whom I will refer to by first name only. These are only representative examples of hundreds of similar issues that I address every year. Taken as a whole, they tell me that the world of personal investing today is not a friendly place in which to travel and is in desperate need of change.

Margaret—The Problem with Advisers

Margaret is a 58-year-old teacher who has over $500,000 of investment money. She has entrusted it to an adviser to whom she pays a yearly fee of 2 percent of the total amount invested. The returns she has been receiving have been less than market averages and she is concerned. She knows little about investing (which is why she is attending my class) and has put her complete faith and trust in her adviser. She suspects something is wrong but does not even know the questions to ask of the financial professional with whom she is working. She is afraid to offend him by challenging his judgment. In a one-on-one discussion following the class period, she shows me her latest broker statements and asks for my comments.

A quick scan of her statements reveals a list of rather mundane mutual funds, all of which have a load, which is nothing more than a sales commission to the broker/adviser. I ask to see an investing plan that the adviser has developed defining her investing goals, time horizon, risk tolerance, and so forth. None exists. I ask to see a prospectus for each of the funds in her portfolio. I am handed glossy marketing brochures instead.

Her portfolio is very poorly thought out and ill-designed. It seems there was little effort made to find investments that meet Margaret’s unique goals and risk profile. It is clear to me that the main driving force behind this random mix of funds is to earn commissions for her adviser.

While most financial advisers are ethical, many are not, as this example illustrates. Biased advisers looking to maximize their income with commissions are one symptom of a financial services industry that is not serving the public well. Margaret is by no means the only one of my students who has shown me a portfolio that is designed to meet the goals of the adviser as opposed to the goals of the investor.

My advice to Margaret is to use the worksheets and Web sites I provide in class to perform a complete due diligence process on each fund she owns. (I provide many of these same resources to you in upcoming chapters.) I tell her to look at the risk, return history, and expenses of each, and then compare these factors to other funds in the same category. Web resources that I show her make such an analysis quick and simple. Armed with this information, she will be able to sit down with her adviser and have a meaningful discussion. She will be able to ask relevant questions and expect reasonable answers. If she does not get them, I suggest that she either look for another adviser or, better still, implement the new approach to investing that she is learning in my class.

John—The Problem with Expert Stock Recommendations

John is a 42-year-old lawyer. He has an adviser who manages a portion of his portfolio but he also likes to invest some money on his own. He came to me with a list of stocks that he had heard recommended on a Saturday morning TV talk show about investing. I could tell that he wanted me to give my blessing to this list of stocks, as he was quite excited about their potential.

I asked him if he had done his own due diligence on each stock. No, he had not. After all, he had received these recommendations from experts. I asked where in his investment plan these stocks fit. Is he looking for long-term growth or short-term profits? He responded that he just wanted to make some quick money.

I asked if he had thought about a trading plan for each stock that, should he buy it, defined price exit points for stopping losses and taking profits. No, he had not. I asked if the TV program he had seen recommended a different set of stocks every week with the same amount of enthusiasm. Yes, he supposed so. Therefore, I pointed out, the day he watched the show was a major determinant of his investing strategy. He did see the absurdity of this.

John is a smart man. He should know that the financial media are tasked with one objective and one objective only: to attract viewers so they can raise advertising rates. And audience surveys have shown that the financial media (TV, newspapers, radio, magazines) get the most eyeballs when they dole out stock recommendations with great enthusiasm. So they do, dozens per day, hundreds per month, and thousands per year.

Are there really that many excellent stocks so underpriced in the market that they are screaming “buys” ? The answer is no. And should the stocks you buy depend on the day you watch a TV show or read a magazine? Again, the answer is no. Far too many people believe they can gain an advantage in the market by taking the advice of experts in the financial media. They can’t.

My advice to John was to turn off the TV. Barring that, I suggested that he watch investing programs only for their entertainment value and perhaps to get stock buying ideas. He should then perform his own due diligence by researching each stock of interest. He was learning how to do this in my class. John was not particularly happy with my response to his questions but agreed that it made sense.

Here is a second reason why I contend that the world of personal investing is broken. The environment is filled with investing entertainment that too often substitutes for serious investing research. The public eats up frenetic stock recommendation shows on TV and often gets financial indigestion by making impulse trades based on what they see and hear.

Suzanne—The Problem with Selling Investments

Suzanne is a high-ranking government employee of Chinese ethnicity who needed more investment income to pay for her son’s college tuition. She employed a friend of the family to advise her.

The friend recommended a mutual fund concentrating on Chinese firms and she showed me the fund prospectus. I immediately saw that the risk of the fund in terms of volatility was very high, and probably not appropriate for Suzanne’s risk profile.

I pulled up a price chart on my computer for the fund, using a financial Web site, and saw that it had returned over 50 percent during the first six months that she owned the fund. It then started to drop, and at the time of our conversation, it was down 25 percent from her purchase price. She was obviously concerned and asked for my advice.

I see this all too often. People buy investments without a plan for selling them. I teach people to divide their portfolio into two segments: a Core Segment and a Target Market Segment. (I discuss these concepts at length in upcoming chapters.) The Core should contain broad-based mutual funds that are buy-and-hold investments. History shows that over the long term they will go up at a predictable pace and with relatively low risk. I recommend that riskier investments go into the Target Market Segment of the portfolio. Here is where more volatile funds, such as the one Suzanne showed me, should be placed. For each of these riskier investments, a trading plan must be put in place at the same time the investment is purchased.

A trading plan is essentially an exit strategy. Price points need to be set for stopping losses and for taking profits. These investments then need to be monitored and sold based on these exit points. The Web, fortunately, allows this to be accomplished automatically, as you will learn in this book.

Suzanne was unfamiliar with the trading plan concept. She simply bought the China fund with no thought of when to sell. So the fund earned for her a nice profit that she did not take. She held the fund and it fell. Now she wanted to know what to do and her adviser friend offered little help.

Here is yet another area where the financial services industry fails the public. Advisers and so-called experts are very good at promoting the purchase of investments, but they tend to ignore the equally important action of selling them. Even though Web resources are freely available that enable individuals to easily put in place an automated selling plan for each investment they buy, few even consider doing so. As a result, they simply buy and hold volatile investments that should be sold in accordance with a trading plan. All portfolios have a place for buy-and-hold investments and a place for buy-and-sell investments. There is, however, no place for buy-and-forget investments.

My advice to Suzanne was to assume that she had just bought the fund yesterday. We used the Web to look at a price chart for the fund to define exit points. I then showed her how to use a Web resource to place automated stop-loss and take-profit selling points for the fund. While still facing a loss on this fund, she was happy that she now, at least, had a plan for moving forward with not only this investment but also with all others in her portfolio.

Mike—The Problem with Trading System Seminars

Mike is a 62-year-old retired government worker. His wife is also retired, and they live on a fixed income. He came to me very excited about a stock-trading seminar he had attended in the past week. He owned a Web-connected home computer and envisioned a future in which he could use this stock-trading system in his spare time to generate significant income. The initial training session and software for the system cost about $5,000 and monthly data feeds cost about $150. He wanted my opinion on whether he should sign up for the program as he handed me a very, very glossy brochure.

I see this question so often that I should simply tape-record my thoughts and hit the play button. Stock-trading systems and related seminars are very successful and profitable—for the company that sells them. The systems are typically based on the user looking at stock price charts that are overlaid with a variety of indicators. These indicators measure aspects of the price charts such as trends, money flow in or out of the stock, strength of price movement, and so on. This type of activity is called technical analysis (TA), and is a very sophisticated technique used by scores of professional investors.

Yet the seminar system made TA look very simple. Mike was told that all he had to do was run a screening program every day to find stocks showing the most promising set of technical indicators and buy the stocks that showed the most green arrows lined up on the chart. This is—I don’t know how else to describe it—pure garbage.

Technical analysis and the study of price charts is not an easy field to master. Professional investors spend years learning the craft and use very powerful computers to predict stock price movements based on price and volume indicators. The chances that an average person sitting at a home computer finding stocks poised for major moves upward based on TA that the professionals have missed are slim and none. Mike was about to fall for a pitch that made a very complex effort seem like child’s play. He was about to buy snake oil.

Instead of putting it so bluntly, I queried him about the dynamics of the three-hour seminar he attended. Were the presenters all tall, tanned, immaculately dressed men? Yes. Did they seem like they wanted to be your personal friend? Yes. Did they try to get the crowd worked up into a frenzy by soliciting loud group responses to such questions as “Who here wants to be rich?” Yes. Were questions banned during the slide presentation because of time constraints? Yes. Did they present any independent analysis of the performance of stocks that the system rated highest? No. Were slides shown presenting testimonials from incredibly successful traders? Yes. Did the speakers mention the full price of the training, the software, and the ongoing data feeds during the presentation? No. Was there a special discounted price offered if you signed up that night? Yes.

Being a smart man, Mike began to see that he was not thinking clearly. He wanted so badly for this trading system to work that he was oblivious to the overt signs of manipulative marketing. The entire seminar was a well-crafted marketing show aimed at creating massive groupthink and impulse buying. The product just happened to be a stock trading system. It could just as easily have been oil wells in Antarctica.

As a final push that closed the door on this potentially bad decision, I asked Mike to consider why the presenters were traveling the country, staying in hotels, eating rubber chicken, and being away from their families giving these seminars. Why aren’t they simply sitting in the comfort of their homes growing rich using the very system they are promoting? I watched, with no particular satisfaction, as Mike threw the brochures in the trash. I was dismayed yet again by another piece of evidence that the world of personal investing is not a friendly place for the individual investor who is desperately seeking answers.

Amy—Where Do I Start?

Amy is just entering the work force after graduating from college. She is 24 years old and starting to earn enough money to put some in an investment account. She tells me that nowhere in school, at any level, had she been taught even the basics of investing. She has seen advertisements for dozens of online brokerages, fund companies, and full service brokers and advisers. She approached me in private to discuss a question that she was embarrassed to ask in class: “Where do I start?”

This is not an embarrassing question at all. It is one that people at all stages of their investing careers should ask if they are not satisfied with the performance of their portfolios.

Amy’s question illustrates very clearly two points. First, young people today are not being taught one of life’s most important skills, namely how to invest so they can protect and grow the wealth they work so hard to earn. Second, when seeking to start their investing career, they see no clear path to learning how to take personal control of their investments. As a result, most people simply throw up their hands in despair and give their portfolios, and their financial futures, to a third-party adviser.