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What's in Your Retirement Portfolio?

It may depend on whether you're a lion, a turtle or an ostrich

En español | Are you watching the stock market and wondering what you should do with your retirement portfolio?

First, buckle your seat belt. It won't be easy steering through this rough passage in history. But depending on your personality, the amount of risk you can take and the principal you need to preserve, you have a number of options.

See also: What's happening to your money?

Head in the sand - characterizes one type of investment portfolio allocation. There are three types: aggressive, conservative and no-risk-at-all.

Photo by Wernher Krutein/Photo Valet

Get your head out of the sand and become a savvy investor.

There's actually a dose of good news behind all of the mayhem. This may be a great time to rebalance and overhaul your portfolio to reduce risk or prune it of losers for tax losses.

There are thousands of companies still turning a profit — and paying dividends. Many of these stocks are attractively priced as well. You can buy them individually or lower your risk by buying mutual funds that bundle them in managed portfolios or in exchange-traded funds (ETFs), which are pools of investments often tied into an index. They're like mutual funds, but trade on stock exchanges.

The key to building a good portfolio is diversification according to how much money you can put at risk — and many investors need advice from a professional. Don't try to time the market; you'll likely guess wrong and lose money.

"The beauty of a well-diversified portfolio is that it tends to smooth the pathway for investors," said Craig Israelsen, an associate professor at Brigham Young University who specializes in personal finance and investment portfolio design. "The highs and lows of market hyper-volatility are experienced, but are not as dramatic. As such, attempting to time the market is somewhat negated by diversification."

The famous economist John Maynard Keynes once said that "animal spirits" were behind market movements. As homage to Lord Keynes, here are some suggested portfolios: the lion, the turtle and the ostrich.

The lion. You're an aggressive investor who doesn't mind market risk. You've put most of your money in an annuity, a pension or assets that are immune to global movements; now you're looking for opportunities for the rest and don't mind being contrarian.

You're not afraid to pounce on sectors and industries that are being beaten up. You know you could lose money with this approach, so you're careful not to commit most of your assets.

Here are some vehicles to consider that could help you grab some bargains:

  • Value mutual funds. These actively managed funds are always looking for good stocks at attractive prices. If you're a value manager, you relish market downturns to find bargains.
  • Financial sector funds. Right now, most banks are in the doghouse, particularly European banks with exposure to Greece, Italy, Spain and Portugal. This is the ultimate high-risk contrarian play right now.
  • Commodity funds. These vehicles invest in everything from corn to coal. As a long-term investor, you know that developing countries still need metals like aluminum, copper, iron and tin. While a slowdown might depress prices now, this could be the right time to buy.
  • Precious metals funds. Gold and silver are refuges in time of panic. You can either invest in ETFs that buy metals directly or mutual funds that buy mining companies.
  • Inverse index ETFs. These specialized ETFs use leverage to bet against a market going up — or down. You can buy them to wager on most stocks, Treasuries and even currencies.

Next: The turtle — cautious investor. >>

The turtle. You're much more cautious than the lion, yet you don't mind having up to 60 percent of your money in stocks. Primarily you're interested in some capital growth with an eye on preservation and income, although you know you could still lose money in this portfolio.

You may be nearing or just starting retirement and you can stomach some market risk. You're willing to accept some modest losses now as a defensive but long-term investor.

  • High-dividend growth funds. Rather than bulk up on individual stocks with healthy dividends, invest in ETFs and mutual funds that track a whole portfolio of companies with records of growing their dividends consistently. Consider those that focus on utilities, health care, energy and consumer staples.
  • Balanced mutual funds. These funds generally have a 60 percent stock, 40 percent bond mix. Another similar consideration is a flexible asset allocation fund that can move in and out of stocks, bonds and other asset classes as market conditions change.
  • Corporate/municipal/emerging-markets bonds. Highly rated bonds offer higher yields than Treasuries. Municipal bonds make most sense for people in the highest tax brackets who hold the notes in taxable accounts. If you buy individual bonds, hold no more than 10 percent of your portfolio in any one issue, and only seek those with the highest-possible credit ratings. Mutual funds and ETFs also hold pools of these debt securities.
  • Global real estate. Consider ETFs that give you exposure to international commercial real estate through publicly traded real estate investment trusts. The yields are more generous than government or corporate bonds, and you'll obtain more diversification.

The ostrich. You do not like risk. You have no desire to risk even a small portion of your principal. While you realize that yields these days are pathetic, you're happy protecting what you have and you need this money to cover living expenses. You'd prefer not to look at the business headlines at all. This is a portfolio for preservation of capital with some protection against inflation.

  • U.S. Treasuries. You can buy ETFs or mutual funds that invest in short-term Treasury bonds (five years or less in maturity). Even with the downgrade of U.S. debt by Standard & Poor's, they are still highly liquid and safe.
  • Money-market funds/accounts. This is a parking place for cash in which yields are paltry. The best rate is 0.06 percent (as of publication). Money-market mutual funds are not insured, but money market bank accounts carry FDIC insurance up to $250,000. The best deals are online, though right now they rarely exceed 1 percent. Also try your local credit union.
  • Treasury inflation-protected bonds (TIPS). Although inflation is low now, it could come roaring back, and that would depress bonds (and bond funds). The U.S. and other governments sell bonds that have yields indexed to a cost-of-living gauge such as the consumer price index, so if inflation returns, you'll actually make money.

These should be a staple of the other two portfolios as well. You can buy TIPS (and their cousins iBonds) through the U.S. Treasury directly.

  • Fixed-rate annuities. If bought from a top-rated insurer, these may be good vehicles to guarantee a fixed monthly payment. Bypass brokers and agents and buy them directly from issuers to avoid commissions. Most large mutual fund companies offer them as well.

Next: The question every investor needs to ask. >>

What every investor needs to know

At the very least, before you do anything, you have to ask yourself, "How much can I afford to lose?" Answering that one question will guide you into the right portfolio.

To focus your thinking, draft a written answer declaring how you want your money invested. The result can be a flexible, risk-adjusted portfolio, with diversification that will save you from being tempted to constantly react to market conditions.

Should you not want to go it alone, get help. Contact a fee-only certified financial planner, registered investment adviser or any fiduciary — someone who's legally required to put your interests first. That means avoiding brokers, insurance agents and others who sell on commission and aren't really in the advice business.

A fiduciary adviser can also help you craft an investment policy statement, rebalance your portfolio when needed and generally keep you out of trouble.

Online resources

Putting together a portfolio is complicated. Here's a list of websites that can help you track down specific investments or create a portfolio with a professional.

  • Yahoo Finance is fairly easy to use. Check out its "Investing Ideas" section for specific stocks and funds.
  • Folio Investing. This site does most of the work for you by selecting from more than 100 "ready to go" portfolios that can best match what you want to do.
  • MyPlanIQ. Similar to Folio Investing, this site allows you to tailor your portfolio even more to your risk profile.

John F. Wasik is a personal finance columnist for Reuters and the author of 13 books, including The Cul-de-Sac Syndrome.