Friday, December 08, 2006

Personal Finance FAQ

On the free content portion of the American Association of Individual Investors, the site contains several articles on reaching retirement goals and common personal finance questions. One of the articles contained the following outline of personal finance questions:
The responses for each category are meant as guidelines. An investor should tailor a financial plan to fit their own goals and objectives.

One important outcome from the development of a financial plan is a road map for the construction of your investment portfolio. The target rates of return for ones investments should be to achieve specific asset level targets laid out in the financial plan. The investment performance, on a year to year basis, should be tied less to a specific market benchmark. The benchmark should be to achieve specific asset levels that are outlined in ones financial plan and not benchmarks like the S&P 500 Index.

Investment portfolios build around a foundation of dividend growth stocks allows an investor a higher probability of achieving the specific asset target levels since dividend growth equities tend to hold their value better in a down market. An important characteristic of dividend growth stocks is their lower volatility in down markets. Not that one should only manage their portfolio to not lose value, but in down markets, with withdrawals coming out of the portfolio, the future required return to get back to the original market value will be larger. For example, if the market is down 20% and withdrawals from the portfolio are 5% annually, to reach the prior years market value, one would need a return of approximately 33%.


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