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To paraphrase the great English playwright Oscar Wilde, every investor should learn the importance of being financially earnest. The Oxford Dictionary defines earnest as “intent and direct in purpose,” two qualities that should be second nature to all who hope to participate in -- and profit from -- the markets. Being financially earnest isn’t just the province of the investor, though. Everyone from the portfolio manager who manages a fund to the financial adviser who promotes it, to the individual shareholder who buys it, should be intent and direct in purpose when it comes to investment technique. At U.S. Global Investors, we have an intimate understanding of this need. We have spent years perfecting our internal investment strategy, which we call a “top-down, bottom-up” approach. Briefly put, “top-down” refers to the broad, macro themes that affect all securities, such as their price and positioning within a sector’s cycle. “Bottom-up” refers to individual stock or bond selection, based on several key valuations of a company or issuing agency. This ensures that no stone is left unturned in the pursuit of financial excellence. Although a sector may look healthy, if the bottom-up fundamental analysis of a company does not fit with the top-down analysis of the sector, we will not purchase the stock or bond under examination. Many in the industry use either a top-down or bottom-up investing discipline, but not the two together. However, we employ a combination of both. This is an important distinction, as it helps ensure the selection of the best securities at the most opportune time in the market. Think of it as extra insurance on your portfolio's holdings. We use this strategy across all fifteen of our no-load funds, which means you benefit from our exacting selection process regardless of the fund you choose. This same “earnestness” should be employed by individuals, not just fund managers or advisers. The most important technique you as an investor can use is that of asset allocation. The Importance of Asset Allocation Asset allocation, simply put, is how you divide your portfolio among the major asset classes: stocks, bonds, cash and other investments. With asset allocation, an investor or his financial adviser determines what percentage of total assets will be allocated to each asset class. Past studies have shown that asset allocation is by far the most important aspect of the investment process. It is commonly accepted that 90% of a portfolio’s return is derived from individual stock performance, with bond selection accounting for the remaining 10%. Although recent studies have concluded that asset allocation accounts for less of a portfolio’s overall performance, financial professionals agree that asset allocation remains very important. Regardless of these conclusions, the studies cannot say specifically how much of a portfolio should be invested in stocks, bonds, cash and other instruments. There are no hard rules because each asset allocation decision must be tailored to a person's unique situation, which includes his or her financial objectives, risk aversion, time horizon and tax bracket. For example, if an investor has a long-term horizon and is certain he or she can handle the market ups and downs, that person probably will be comfortable with an almost all-stock portfolio. Conversely, if they have a short investment horizon and the risk of stocks makes them nervous, they should invest primarily in cash and bonds. Three commonly suggested asset allocation portfolios are the following:  These examples are intended only as general guidelines, and your actual portfolio should include individual factors, such as your specific risk tolerance, financial objectives, time horizon and tax bracket. |
