Linda Eden, CFP®

Building an investment portfolio is a lot like cooking. It’s all about putting the right ingredients together. Think of it like making salsa. Great salsa is all about diversification. Only by adding diverse ingredients together can you achieve the desired outcome. There are some ingredients in salsa that most of us would not want to eat alone, like hot peppers, but without the “hot” ingredients the salsa would be flat. Too much of the “hot” and….well it’s just too hot! An investment portfolio should include a wide variety of diverse ingredients or “assets”. U.S. stocks are often the core ingredient in a portfolio, sort of like the tomatoes in salsa. How about commodities or natural resources? They’re like the hot peppers. In the right amounts they can be a good thing, but too much and you might get burned. Each investment asset adds important diversification to a portfolio because each asset behaves differently. This diversity is vitally important in salsa… and in investment portfolios too.

We like to call our salsa…or… investment portfolio the 7/12 portfolio.

The 7/12 portfolio has 7 core assets classes and 12 sub classes. The money is divided equally among the 12 different assets. This is because during any economic time period, one never knows which asset class will be the best performer. Sometimes it’s cash (CDs and money market funds), other times it may be emerging market stocks. This allocation prevents the investor from becoming over exposed to any one asset class.

The allocation is maintained by rebalancing the portfolio back to equal amounts annually. Rebalancing consists of selling assets that have become over-weighted and adding the money to those that have a balance less than 1/12th of the total portfolio. This discipline causes the portfolio to maintain a certain risk level and is designed to protect the investor from emotionally charged buy and sell decisions, most of which usually cause more harm than good.

As we know all too well, experiencing large losses is harmful to an investment portfolio and it doesn’t feel very good either! Even more damaging to long-term success is destructive “panic behavior” of investors when their portfolio is tanking. The tendency is to bail out at the wrong time or following large losses. Protecting money in a portfolio has a lot to do with minimizing the events that cause panic, such as large losses. Because the 7/12 portfolio maintains an equal allocation strategy it helps to achieve two major objectives of a portfolio:

  1. Grow Money
  2. Help protect money by mitigating risk

Finally, it is important to point out that this is not an investment management strategy based solely on picking the best 12 investments in the investment universe. It is based entirely on using 12 different investments with good track records that are individually a pure representation of each asset class in the portfolio, allocating the money equally between those assets and maintaining that allocation by rebalancing the portfolio annually.

We are committed to finding better ways to manage risk in your portfolio. The research we’ve done on the 7/12 risk management strategy has convinced us it can be a useful tool in accomplishing that objective.

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or investment model made reference to directly or indirectly in this advertisement will be profitable or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Cambridge or any other investment professional. The information contained within this document should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Cambridge. Information pertaining to Cambridge’s advisory operations, services, and fees is set forth in the Cambridge Investment Research Advisors’ current disclosure statement, a copy of which is available upon request.
Investing in securities (including the models advertised herein) involves risk of loss. Further, depending on the different types of investments there may be varying degrees of risk. Clients and prospective clients should be prepared to bear investment loss including loss of original principal.
Because of inherent risk of loss associated with investing, Cambridge is unable to represent, guarantee, or even imply that our services and methods of analysis can or will predict future results, successfully identify market tops or bottoms, or insulate you from losses due to market corrections or declines.
Linda Eden is a Registered Principal offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2009 Linda Eden. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.