Steps to Build Your Portfolio

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Portfolio ManageMent

(4)Steps to Build Your Portfolio
a disciplined approach — and these powerful tools — can keep you moving toward any investment goal
By Stephanie Giroux, cFa
Chief Investment Strategist, TD AMERITRADE

in the stock market, as in life, there’s a temptation not to rock the boat when the sailing is smooth. who stops to calculate exposure to risk during a bull market, when each day’s returns are better than those earned the day before? Yet nothing is static, and if you haven’t taken precautions, such as building diversification into your investment strategy, the next big wave — you know it’s out there — can sink your portfolio before you sail into the sunset.

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to determine how much it will cost, when you’ll need the money and how you intend to fund the investments that will get you there. A major factor is an honest assessment of how much investment risk you can tolerate. Typically, the higher your risk tolerance, the higher your potential return. But if a high-risk portfolio suddenly plunges, you must be able to hold on until the markets recover. If, instead, you sell in a panic when your stocks are getting beaten up, you may derail your investment plan and defeat the purpose of taking on extra risk in the first place. It’s better to understand where your comfort zone is and stay within it. Suppose you plug the price tag for your goal into a financial calculator that concludes you’ll need an average annual return of 12% to build a sufficient nest egg to support your retirement plans. That may be possible, but to get there you’ll probably have to be comfortable with an aggressive portfolio and higher volatility. Volatility could magnify both gains and losses. Portfolios can rise by double digits or sink by just as much. If that’s more volatility than you can handle, you’ll need to be satisfied with lower returns. A portfolio that delivers single-digit returns is more likely to experience milder swings.
How td ameritrade can HelP wealthruler™ is a planning tool (under planning & retirement) that lets you instantly see how altering different aspects of your investment strategy — assuming more risk, contributing more each month, extending your time horizon — can help get you closer to your retirement savings goal. and amerivest Portfolios, provided by a td ameritrade affiliate, also offer built-in planning that reflects investor risk tolerance, time horizons and return objectives.

example, and spreading the rest across broad fixedincome choices. Asset allocation, Ibbotson and Kaplan determined, was more important than the actual choice of funds or individual securities. Diversifying among sub-asset classes and styles (such as small-cap growth stocks, emerging markets and commodities) is crucial. Yet few investors push the boundaries far enough to be truly diversified. We tend to buy what we know, which usually means choosing investments that are closely correlated. The idea behind diversification is to ensure that the market will always favor a portion of your portfolio, thereby helping to mitigate the losses from underperforming investments. Also guard against becoming excessively concentrated in a particular asset class. If, for example, your biggest asset is your home, think twice about investing in residential REITs and increasing your exposure to the real estate sector. Similarly, if you hold your own company’s stock in your 401(k), you may want to steer clear of the same industry in the other securities you buy.
How td ameritrade can HelP the online Portfolio Planner (go to “Portfolio” under portfolio & accounts) allows you to map your holdings to an asset-allocation strategy that best fits

your risk tolerance and investing time frame. the leading-edge tool also enables you to place trades. if you want to create a new portfolio, consider using the Self-directed amerivest investment advisory service. Based on your goal, risk tolerance, time frame and budget, it will recommend a portfolio of etFs allocated across different asset classes. You can also set up automatic rebalance of your portfolio. Go to “Selfdirected amerivest” on the “Portfolio Guidance” page (under planning & retirement). You can also visit a local td ameritrade branch or call a client Services representative at 800-669-3900 for help.

Portfolio ManageMent

Step 3: Select Securities
Now that you’ve chosen your asset-allocation strategy, you can choose from a wide variety of investment vehicles to create your portfolio. Although that wealth of choices can be an advantage, it’s more likely to lead to confusion unless you have the right guidance and tools. Consider your allocation to large-cap stocks. You might choose several stocks from the Dow Jones industrial average, an ETF that tracks Standard & Poor’s 500 or an actively managed large-cap mutual fund. The challenge

Previous sPread: Fancy PhotograPher/veer; this Page: Jonathan Kirn/getty images

Sure, you’ve heard the advice a million times to diversify. Yet the portfolios of most investors aren’t nearly as diversified as they should be, and that means unnecessary exposure to risk. Even well-diversified portfolios can’t be left on autopilot. As time passes, allocations get out of whack — and so do the chances of realizing financial objectives. Successful investing, whether you’re an active trader or you buy and hold for the long term, hinges on a four-step disciplined process.

the circle-Back approach
this four-step process for building or rebalancing a portfolio can help you reach your investment goals. if you’ve missed a step, you can easily circle back and apply it to your strategy
SET PORTFOLIO STRATEGY • Diversification • Asset allocation • Determine the mix
Step 2

diversifying among sub-asset classes and styles is crucial. Yet few investors push the boundaries far enough to be truly diversified.

Step 1:

Set Goals

Step 2: allocate assets
Investors have never had more financial products to choose from than they do today. In 2000, for example, there were about 80 Exchange Traded Funds (ETFs); today there are more than 500. But simply investing in the hottest new product will make for a chaotic portfolio and will probably cut into your profits. A study by investment consultants Roger G. Ibbotson and Paul D. Kaplan1 found that more than 80% of the success of a portfolio depends on how its assets are allocated — putting 60% in stocks, for

ESTABLISH PERSONAL GOALS • One or several goals • Time horizon • Funding • Acceptable risk/return

SET GOALS

Step 1

Everyone has a laundry list of financial desires — top colleges for the kids, a vacation home by the sea, a fabulous retirement — and often the tendency is to go after them all at once without deciding what’s most important. But unless you prioritize your goals, achieving any of them may be a long shot. Maybe your idea of a rewarding retirement involves embarking on a five-star trip to all seven continents. Establishing that dream is the first step; then you have

EVALUATE PROGRESS

Step 4

4 STEPS TO SUCCESSFUL INVESTING
Step 3

ALLOCATE ASSETS

michael moran

PROGRESS REPORT • Portfolio review: Risk and return • Goals: Affirm or adjust • Align and rebalance

SELECT SECURITIES

EXECUTE STRATEGY • Security selection • Fill the asset allocation sleeves

•Bottom-u Process p •“Fill Pie Pieces”

learn more: www.tdameritrade.com/portfolioplanner
8 w w w. t d a m e r i t r a d e . c o m 888-871-9007 9

Portfolio ManageMent

You’ll want to evaluate your portfolio periodically against your goals and in light of changes in your life.

is to achieve diversification both within and across asset classes while avoiding investment overlap. For example, suppose you own shares of General Electric, plus an S&P 500 ETF. Because GE constitutes 3% of the S&P 500, your exposure to the company may be higher than you intended. On the bond side of your allocation, you may face other perplexing choices. There are many, often esoteric, subcategories of bonds, and individual bonds may require a large investment. But there are now at least 30 fixed-income ETFs that give you access to municipal, corporate and international bonds and many other categories.
How td ameritrade can HelP a wealth of research tools is available when you log on to your account. the stock screener (under research & ideas, choose “Stocks,” then scroll down and select “Screener”) allows you to vet stocks based on criteria you deem important, while a large library of third-party analysts’ reports offers insights on specific companies and sectors.

You can also compare the performance of a mutual fund against that of an etF or index fund. td ameritrade’s Premier list (on the “mutual Funds” page under research & ideas ) is a list of mutual funds expressly chosen by morningstar.2 td ameritrade’s new Bond wizard can help you choose securities for the fixed-income side of your portfolio. Under research & ideas, choose “Bonds & cds,” then “Start Bond wizard now.” You can select individual bonds or build a ladder of bonds with staggered maturities — or select from seven prepackaged ready-made ladders. For an easy portfolio solution, amerivest offers target date investment Portfolios, a broad mix of etFs designed to match the time frame of your financial goal. Portfolio allocations typically begin by aggressively pursuing capital appreciation while accepting significant risk. then, as you draw nearer to your target date — retirement, for example — allocation recommendations shift to a lower risk profile. (Go to “amerivest target date investment Portfolios” on the “Portfolio Guidance”

page under planning & retirement.) other choices include the tdaX independence lifecycle etFs, which are designed for specific time horizons (click “Portfolio Guidance” under planning & retirement). the series of etFs from the XShares Family of Funds includes four target-date choices plus an in-target choice. the four target-date etFs typically focus on capital appreciation early on, then automatically adjust asset allocations as the target date approaches. the in-target etF seeks conservation of capital for the first five years, then gradually shifts to moderately conservative.

ira rolloVer

by larry Stevens

Step 4: evaluate Progress
Buy and hold is a perfectly acceptable strategy, but buy and forget is not. As the market fluctuates and favors certain asset classes over others, your winners will assume an ever larger percentage of your portfolio, throwing your asset allocation out of balance. At least once a year, you should trim back your high performers and consider adding to the investments that took a beating, provided your research still supports them. Rebalancing can reduce volatility, and that means less risk for investors. Recent research from T. Rowe Price found that investors who stuck to their asset allocation by rebalancing every year since 1984 had nearly the same average returns as investors who left their investments alone, but significantly with 18% less volatility.3 You’ll also want to evaluate your portfolio periodically against your goals and in light of changes in your life. Early retirement, for example, may leave you with a greater need for income, requiring you to reduce your allocation to equities. Or a promotion and a higher salary may give you the security to invest more aggres-

why You need an ira
It’s easy to overlook the advantages of an Individual Retirement Account (IRA). The ceiling on contributions is lower than for an employer-sponsored 401(k), and the money you put into an IRA may not be tax deductible. Yet a Traditional or Roth IRA can help you go beyond what you’re able to save at work and consolidate retirement accounts from former employers. And a rule change could add to the potential benefits. Contributions to a Traditional IRA are capped at $4,000 for the 2007 tax year, with a $5,000 maximum in 2008. If you’re 50 or older, you may put in an additional $1,000 a year. That money may or may not be deductible, depending on your income and whether you participate in a 401(k). In either case, investment gains in the account compound without taxes. Taxes are not

opening one can boost savings and simplifyuntil you make withdrawals. — and couldthe $100,000 restriction will be lifted, so investment decisions With a do even more starting in 2010 owed
Roth IRA, contributions aren’t deductible, but all qualified distributions are tax-free. You can make a full $4,000 contribution to a Roth for 2007 only if your adjusted gross income is less than $99,000 (single taxpayer) or under $156,000 (if married and filing jointly). Contributions begin to phase out above those levels and are eliminated completely at $114,000 and $166,000 for single and joint filers, respectively. And to convert a Traditional IRA to a Roth, a process that requires paying income tax on the converted amount, singles or married couples must make less than $100,000. That rule will soon change, says Keith Garcia, TD AMERITRADE’s Senior Manager for Retirement and Goal Planning, thanks to the Tax Increase Prevention and Reconciliation Act. In the 2010 tax year, anyone regardless of income can convert a Traditional IRA to a Roth. “A conversion makes more sense if you are able to use funds outside your IRA to pay your tax bill because withdrawing any IRA funds early may result in penalties and additional tax,” Garcia advises. He adds that if you convert in 2010, you’ll get to spread your tax bill over two years — 2011 and 2012. Meanwhile, if you switch jobs you can roll over your 401(k) to a Traditional IRA — and convert it later to a Roth IRA. “An IRA lets you manage your assets without being limited to the investment choices offered by your former employers,” Garcia says. “It’s also easier to create a diversified portfolio if you’re investing from just one account.”
suzanne & nicK geary/getty images

sively. At the same time that you’re rebalancing your portfolio, revisit your financial goals to make sure your current investment strategy and asset allocation are still a good fit for what you want to accomplish. Resist the urge, however, to revamp your portfolio just because of market events. Keeping emotion out of your investment decisions isn’t easy, but sticking with the four steps will impose discipline that should serve you well in the long term. n
1. Roger G. Ibbotson and Paul D. Kaplan, “Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?” Financial Analysts Journal, January/February 2000. 2. Morningstar Associates generates this list by evaluating funds available through TD AMERITRADE, then monitoring and updating the list on an ongoing basis. 3. Paul J. Lim, “When It Comes to Rebalancing, a Little Means a Lot,” New York Times, Aug. 5, 2007, Sunday Money, p. 5.

TD AMERITRADE does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

Before investing in any investment company, carefully consider the investment objectives, risks, charges and expenses involved. To learn how to obtain a prospectus containing this and other important information, please visit www.tdameritrade.com or call a TD AMERITRADE representative at 800-669-3900. Please read the prospectus carefully before investing. ETFs are registered investment companies that trade on an exchange like a stock. Commission fees apply. ETFs are subject to risks similar to those of stocks, including those regarding short selling and margin-account maintenance, and trading prices may not reflect the actual Net Asset Value of the underlying securities. There is no assurance that the investment process will consistently lead to successful investing. Diversification does not eliminate the risk of experiencing investment losses. Amerivest is an investment advisory service of Amerivest Investment Management, LLC, an SEC-registered investment advisor. Brokerage services are provided by TD AMERITRADE, Inc. TD AMERITRADE, Inc. and Amerivest Investment Management, LLC are both wholly owned subsidiaries of TD AMERITRADE Holding Corporation. Amerivest is a trademark of TD AMERITRADE IP Company, Inc. Morningstar Associates, LLC is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. TDAX Funds, Inc. Independence ETFs are distributed by ALPS Distributors, Inc. XShares Advisors LLC serves as advisor to the funds. Amerivest Investment Management, LLC serves as a sub-advisor to the funds. TD AMERITRADE is not affiliated with TDAX Funds, Inc., XShares Advisors LLC or ALPS Distributors, Inc. TDX324 Exp. 11/18/09

learn more: www.tdameritrade.com/irarollover
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