This is a question from my economic class at school and I really don't get what a balanced portfolio would consist of. The question is probably getting at the concept of diversification. By combining assets that don't covary "too strongly", you can create a portfolio that has the weighted average expected return of all of the assets, but a level of risk that is much less than the weighted average level of risk of the individual assets.
TJ:
THere are diversified mutual funds that are less diversified than BH. The following came from page 2 of BH's 2006 annual report. This is about a diversified accross industries as one can get!
Berkshire Hathaway Inc. is a holding company owning subsidiaries that engage in a number of diverse business activities including property and casualty insurance and reinsurance, utilities and energy, finance, manufacturing, services and retailing. Included in the group of subsidiaries that underwrite property and casualty insurance and reinsurance is GEICO, one of the four largest auto insurers in the United States and two of the largest reinsurers in the world, General Re and the Berkshire Hathaway Reinsurance Group. Other subsidiaries that underwrite property and casualty insurance include National Indemnity Company, Medical Protective Company, Applied Underwriters, U.S. Liability Insurance Company, Central States Indemnity
Company, Kansas Bankers Surety, Cypress Insurance Company and several other subsidiaries referred to as the 鈥淗omestate Companies.鈥?MidAmerican Energy Holdings Company (鈥淢idAmerican鈥? is an international energy
holding company owning a wide variety of operating companies engaged in the generation, transmission and distribution of energy. Among MidAmerican鈥檚 operating energy companies are Northern and Yorkshire Electric; MidAmerican Energy Company; Pacific Power and Rocky
Mountain Power; and Kern River Gas Transmission Company and Northern Natural Gas. In addition, MidAmerican owns HomeServices of America, a real estate brokerage firm. Berkshire鈥檚 finance and financial products businesses primarily engage in proprietary investing strategies (BH Finance), commercial and consumer lending (Berkshire Hathaway Credit Corporation and Clayton
Homes) and transportation equipment and furniture leasing (XTRA and CORT). Shaw Industries is the world鈥檚 largest manufacturer of tufted broadloom carpet. McLane Company is a wholesale distributor of groceries and nonfood items to convenience stores, wholesale clubs, mass merchandisers, quick service restaurants and others. Numerous business activities are conducted through Berkshire鈥檚 other manufacturing, services and retailing subsidiaries. Benjamin Moore is a formulator, manufacturer and retailer of
architectural and industrial coatings. Johns Manville is a leading manufacturer of insulation and building products. Acme Building Brands is a manufacturer of face brick and concrete masonry products. MiTek Inc. produces steel connector products and engineering software for the building
components market. Fruit of the Loom, Russell, Garan, Fechheimer, H.H. Brown Shoe Group and Justin Brands manufacture, license and distribute apparel and footwear under a variety of brand names. FlightSafety International provides training of aircraft and ship operators. NetJets provides fractional ownership programs for general aviation aircraft. Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture and Jordan鈥檚 Furniture are retailers of home furnishings. Borsheim鈥檚, Helzberg Diamond Shops and Ben Bridge Jeweler are retailers of fine jewelry.
In addition, other manufacturing, service and retail businesses include: Buffalo News, a publisher of a daily and Sunday newspaper; See鈥檚 Candies, a manufacturer and seller of boxed chocolates and other confectionery products; Scott Fetzer, a diversified manufacturer and distributor of commercial and industrial products, the principal products are sold under the Kirby and Campbell Hausfeld brand names; Albecca, a designer, manufacturer, and distributor of highquality picture framing products; CTB International, a manufacturer of equipment for the livestock and agricultural industries; International Dairy Queen, a licensor and service provider to about 6,000 stores that offer prepared dairy treats and food; The Pampered Chef, the premier direct seller of kitchen tools in the U.S.; Forest River, a leading manufacturer of leisure vehicles in the U.S.; Business Wire, the leading global distributor of corporate news, multimedia and regulatory filings; and Iscar Metalworking Companies, an industry leader in the metal cutting tools business. Balanced portfolio:
Cash
Money market funds
Investment in "index" mutual funds
Possibly a broad array of stocks from a variety of industries and countries
How: Open an online brokerage account. Fund it by direct transfer from your bank account. Buy mutual fund "shares," and stocks that you're interested in. Leave some money in cash (your broker probably will put it into a money market fund for you).
Why: Investing is a way to keep your money working -- invest well, and the value of your brokerage account will increase.
A "balanced" portfolio is favored by advisors because no one can predict which "sector of the market" will do the best, and which will fall, so it's best to have money in a lot of things, instead of putting all your eggs in one basket, so to speak. Go to google and search for Warren Buffet's quote: 'Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing'. Read some of those articles, write a report and take it to your economics professor.
If (s)he complains, ask if (s)he has a better track record than WB. Somehow I doubt it. Well the younger you are, the more risk you will want to take. The easiest answer to your question is to take your age and subtract it from 120. That number you get is the percentage of your portfolio that should be in stocks. The rest should be in bonds.
So if you are 30, it goes like this: 120-30 = 90. Your portfolio should be 90% stocks and 10% bonds. You can see how time goes on that more and more should be in bonds and less in stocks, taking on less risk. |
