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.

6 w w w. t d a m e r i t r a d e . c o m

Sure, you’ve heard the advice a million times to diver-
sify. Yet the portfolios of most investors aren’t nearly as
diversified as they should be, and that means unneces-
sary 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.
Step 1: Set Goals
Everyone has a laundry list of financial desires — top
colleges for the kids, a vacation home by the sea, a fabu-
lous retirement — and often the tendency is to go after
them all at once without deciding what’s most impor-
tant. 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
8 w w w. t d a m e r i t r a d e . c o m
Portfolio
Management
to determine how much it will cost, when you’ll need example, and spreading the rest across broad fixed- your risk tolerance and investing time frame. The
the money and how you intend to fund the investments income choices. Asset allocation, Ibbotson and leading-edge tool also enables you to place trades.
that will get you there. Kaplan determined, was more important than the ac- If you want to create a new portfolio, consider
A major factor is an honest assessment of how much in- tual choice of funds or individual securities. using the Self-Directed Amerivest investment
vestment risk you can tolerate. Typically, the higher your Diversifying among sub-asset classes and styles (such advisory service. Based on your goal, risk
risk tolerance, the higher your potential return. But if a as small-cap growth stocks, emerging markets and com- tolerance, time frame and budget, it will
high-risk portfolio suddenly plunges, you must be able to modities) is crucial. Yet few investors push the boundar- recommend a portfolio of ETFs allocated across
hold on until the markets recover. If, instead, you sell in ies far enough to be truly diversified. We tend to buy different asset classes. You can also set up
a panic when your stocks are getting beaten up, you may what we know, which usually means choosing invest- automatic rebalance of your portfolio. Go to “Self-
derail your investment plan and defeat the purpose of tak- ments that are closely correlated. The idea behind diver- Directed Amerivest” on the “Portfolio Guidance”
ing on extra risk in the first place. It’s better to understand sification is to ensure that the market will always favor a page (under planning & retirement).
where your comfort zone is and stay within it. portion of your portfolio, thereby helping to mitigate the You can also visit a local TD AMERITRADE
Suppose you plug the price tag for your goal into a losses from underperforming investments. branch or call a Client Services Representative at
financial calculator that concludes you’ll need an aver- Also guard against becoming excessively concentrated 800-669-3900 for help.
age annual return of 12% to build a sufficient nest egg in a particular asset class. If, for example, your biggest as- Diversifying
to support your retirement plans. That may be possible, set is your home, think twice about investing in residen- Step 3: Select Securities among
but to get there you’ll probably have to be comfortable tial REITs and increasing your exposure to the real estate Now that you’ve chosen your asset-allocation strategy, sub-asset
with an aggressive portfolio and higher volatility. Volatil- sector. Similarly, if you hold your own company’s stock
ity could magnify both gains and losses. Portfolios can in your 401(k), you may want to steer clear of the same
you can choose from a wide variety of investment
classes and
vehicles to create your portfolio. Although that wealth
rise by double digits or sink by just as much. If that’s more industry in the other securities you buy. of choices can be an advantage, it’s more likely to lead to
styles is
volatility than you can handle, you’ll need to be satisfied confusion unless you have the right guidance and tools. crucial. Yet
with lower returns. A portfolio that delivers single-digit How TD AMERITRADE can help Consider your allocation to large-cap stocks. You might few investors
returns is more likely to experience milder swings. The online Portfolio Planner (go to “Portfolio” choose several stocks from the Dow Jones industrial push the
under portfolio & accounts) allows you to map your average, an ETF that tracks Standard & Poor’s 500 or an
How TD AMERITRADE can help holdings to an asset-allocation strategy that best fits
boundaries
actively managed large-cap mutual fund. The challenge
WealthRuler™ is a planning tool (under planning & far enough
retirement) that lets you instantly see how altering to be truly
different aspects of your investment strategy
The Circle-Back Approach diversified.
— assuming more risk, contributing more each
This four-step process for building or rebalancing a portfolio can help you reach your investment
month, extending your time horizon — can help
goals. If you’ve missed a step, you can easily circle back and apply it to your strategy
get you closer to your retirement savings goal.
And Amerivest Portfolios, provided by a
Previous Spread: Fancy Photographer/Veer; This page: Jonathan Kirn/Getty Images
SET PORTFOLIO STRATEGY
TD AMERITRADE affiliate, also offer built-in ESTABLISH PERSONAL GOALS Step 1
• One or several goals SET • Diversification
planning that reflects investor risk tolerance,
• Time horizon GOALS • Asset allocation
time horizons and return objectives.
• Funding • Determine the mix
• Acceptable risk/return
Step 2: Allocate Assets Step 4 4 STEPS TO Step 2
Investors have never had more financial products EVALUATE SUCCESSFUL ALLOCATE
PROGRESS INVESTING ASSETS
to choose from than they do today. In 2000, for ex-
ample, there were about 80 Exchange Traded Funds
(ETFs); today there are more than 500. But simply Step 3
investing in the hottest new product will make for PROGRESS REPORT SELECT EXECUTE STRATEGY
SECURITIES
a chaotic portfolio and will probably cut into your • Portfolio review: Risk and return • Security selection
profits. A study by investment consultants Roger G.
• Goals: Affirm or adjust • Fill the asset
• Align and rebalance allocation sleeves
Michael Moran
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
•Bottom-up Process
•“Fill Pie Pieces”
Learn more: www.tdameritrade.com/portfolioplanner
888-871-9007 9
 Portfolio
Management
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
You’ll want higher than you intended.
to evaluate On the bond side of your allocation, you may
face other perplexing choices. There are many, often
your portfolio esoteric, subcategories of bonds, and individual bonds
periodically may require a large investment. But there are now at
against your least 30 fixed-income ETFs that give you access to
goals and municipal, corporate and international bonds and
many other categories.
in light of
changes in How TD AMERITRADE can help
your life. 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.
Why You Need an IRA
Opening one can boost savings and simplify investment decisions — and couldthe
owed until you make withdrawals. With a
do$100,000
even more
restriction will be lifted, so
It’s easy to overlook the advantages Roth IRA, contributions aren’t deductible,
of an Individual Retirement Account but all qualified distributions are tax-free.
(IRA). The ceiling on contributions is lower You can make a full $4,000 contribution
than for an employer-sponsored 401(k), and to a Roth for 2007 only if your adjusted
the money you put into an IRA may not be gross income is less than $99,000 (single
tax deductible. Yet a Traditional or Roth IRA taxpayer) or under $156,000 (if married and
can help you go beyond what you’re able filing jointly). Contributions begin to phase
to save at work and consolidate retirement out above those levels and are eliminated
accounts from former employers. And a rule completely at $114,000 and $166,000 for
change could add to the potential benefits. single and joint filers, respectively. And
Contributions to a Traditional IRA are to convert a Traditional IRA to a Roth, a
capped at $4,000 for the 2007 tax year, process that requires paying income tax on
with a $5,000 maximum in 2008. If you’re the converted amount, singles or married
50 or older, you may put in an additional couples must make less than $100,000.
$1,000 a year. That money may or may not That rule will soon change, says Keith
be deductible, depending on your income Garcia, TD AMERITRADE’s Senior
and whether you participate in a 401(k). In Manager for Retirement and Goal Planning,
either case, investment gains in the account thanks to the Tax Increase Prevention and
compound without taxes. Taxes are not Reconciliation Act. In the 2010 tax year,
TD AMERITRADE does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
10 w w w. t d a m e r i t r a d e . c o m
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”
starting in 2010
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.”
page under planning & retirement.) Other choices
include the TDAX Independence lifecycle ETFs,
which are designed for specific time horizons IRA by Larry
ROLLOVER Stevens
(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.
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 port-
folio, throwing your asset allocation out of balance.
At least once a year, you should trim back your high sively. At the same time that you’re rebalancing your
performers and consider adding to the investments portfolio, revisit your financial goals to make sure your
that took a beating, provided your research still sup- current investment strategy and asset allocation are still
ports them. Rebalancing can reduce volatility, and a good fit for what you want to accomplish.
that means less risk for investors. Recent research Resist the urge, however, to revamp your portfolio
from T. Rowe Price found that investors who stuck just because of market events. Keeping emotion out
to their asset allocation by rebalancing every year of your investment decisions isn’t easy, but sticking
since 1984 had nearly the same average returns as with the four steps will impose discipline that should
investors who left their investments alone, but sig- serve you well in the long term. n
nificantly with 18% less volatility.3
You’ll also want to evaluate your portfolio periodi- 1. Roger G. Ibbotson and Paul D. Kaplan, “Does Asset Allocation
Policy Explain 40%, 90%, or 100% of Performance?” Financial
cally against your goals and in light of changes in your Analysts Journal, January/February 2000.
life. Early retirement, for example, may leave you with 2. Morningstar Associates generates this list by evaluating funds
available through TD AMERITRADE, then monitoring and
a greater need for income, requiring you to reduce your updating the list on an ongoing basis.
allocation to equities. Or a promotion and a higher 3. Paul J. Lim, “When It Comes to Rebalancing, a Little Means a
salary may give you the security to invest more aggres- Lot,” New York Times, Aug. 5, 2007, Sunday Money, p. 5.
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
Suzanne & Nick Geary/Getty Images
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
888-871-9007 11