Bill Carter, a certified financial planner, is president of Carter Financial Management, Dallas; 214/363-4200. He's also broker-owner of Coldwell Banker—Bill Carter, Decatur, Texas.
Balance Your Portfolio Even if You Have to Battle Your Instincts
October 1, 1996
During my cadet training at Texas A&M University in the 1960s, I had a drill sergeant who had a penchant for toughness, yet could also be gentle and sincere. He was a man of great extremes who had trouble balancing his need for strong discipline with giving us encouragement and advice.
As REALTORS®, many of us fight our own inner battles over our investment portfolios. We're passionate about real estate, and we understand it. So we tend to pour our money into properties we see as great investments.
But when we focus on real estate as our sole investments, our portfolios tilt out of kilter. As a REALTOR® and certified financial planner, I've seen, experienced, and advised portfolio balance during good and bad times. Consistent success depends on balance.
In Texas during the early '80s, real estate was as good as gold, especially for Jim, a financial planning client who seemed to have the Midas touch. Then the late '80s arrived, along with a devastating real estate crash. Jim lost $2 million. We'd advised diversification and balance, but he didn't listen.
What's balance, and how do you get it? The definition is elusive, since everyone has different investment needs, goals, and characteristics. But how to develop and manage a balanced investment portfolio is based on several principles:
- Maintain emergency savings of at least three to six months of expenses. Make sure it's a liquid account, such as a money market mutual fund or a bank money market account.
- Evaluate your existing portfolio allocation for balance by determining the percent of real estate, equities, and bonds.
- Most individuals should have no more than 25 percent of their portfolio invested in real estate. Real estate practitioners can usually have up to 35 percent because of their knowledge of real estate. Avoid any more than that, especially if it's leveraged.
- The textbook rule of thumb is that a safe, conservative approach for those in their 40s is to have a portfolio with 25 percent in real estate, 33 percent in bonds, and 42 percent in stocks (preferably stock mutual funds).
- For baby boomers and younger, I recommend a more aggressive approach. They must accumulate more money, since they're expected to live at least 20 years past retirement. Balance your portfolio with 35 percent in real estate, 17 percent in bonds and other fixed-income vehicles, and 48 percent in stocks (again, mostly mutual funds). The portfolio will experience more volatility, but it's necessary for higher long-term returns.
- Unless you are a financial wizard and can closely monitor the stock market daily, focus on mutual funds rather than on individual stocks, since they offer diversification and professional management.
- Try to maximize your individual retirement account (IRA), simplified employee pension plan (SEP), or 401(k). These offer income tax savings and provide tax-deferred growth.
- Resist the temptation to invest in any asset-real estate included-that doesn’t meet the core objectives you and your planner have defined for your financial plan or overall investment portfolio.
- Maintain proper asset allocation by reviewing and reevaluating the portfolio at least annually with your financial planner.
If you tend to focus on real estate as your primary investment, start with these basics and build an investment portfolio that achieves long-term financial security.
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Updated: September 22, 2022