8 The Dallas Post Dallas, PA Thursday, March 7, 2002 By Michael W. Duricko, PhD. Within the past decade there has been unprecedented move- ment in the equity and fixed-in- come markets. In dynamic eco- nomic times even novice in- vestors are gratified by their in- vestment returns. Often, howev- er, when investment results are sustained for a period of time, a grave misconception of possess- ing investment expertise, as op- posed to riding the market, may result in a rude awakening. In- vestment expertise takes time to develop, it involves planning, the establishment of goals, working within a time horizon and having a total comprehension of risk tol- erance. Locking into an attractive rate of return a few years ago may have appeared to be the right thing to do, at the time. After all, no one has the ability to foresee precise future interest rate move- ments. Many investors enjoyed a good rate of return on a fixed-in- come security that has recently matured leaving them with the dilemma of placing cash from the maturity into a much lower pay- ing instrument. So how does one compensate for unexpected mar- ket movements and at the same time maximize investment re- turn? “Although there are many fun- for you to pursue. Let’s assume you have properly created such a plan. Perhaps, your investment portfolio ratio has been estab- lished to be 80% in fixed-income securities and 20% in high quali- ty equity (stock) mutual funds for a portfolio totaling $100,000.00 of investable funds. The laddered approach to this in- vestment portfolio would be as follows: Fixed Income Securities Assuming 80% of the portfolio would be invested in fixed-in- come securities, your first task is to divide 80% of your investment portfolio by four (this number will vary upon the size of the portfolio, liquidity needs, and the amount predetermined to be in- vested in fixed-income securities. In this case $80,000.00 (80% of the $100,000.00 investable port- folio) will be divided by four to equal the laddered amount of four $20,000.00 blocks. The number and size of your blocks will be determined by your mod- el. There are now five parts to the total investment portfolio — four $20,000.00 fixed-income se- curity blocks and a balance allo- cated to equities. The next step is to ladder the four $20,000.00 blocks by deciding what type of investment to purchase for each block. If Certificates of Deposit are the choice, then the approach should be to buy a $20,000.00 certificate maturing in one year; a $20,000 certificate maturing in two years; a $20,000.00 certifi- cate maturing in three years and $20,000.00 certificate maturing in four years. This. approach, more or less, will avail your in- vestments to the upward and downward trends in the interest rate market by having 25% of the fixed-income investment portfo- lio mature on an annual basis with a reinvestment of those funds into current interest rates for a specific number of years. You can now see the advantage of laddered maturities wherein this approach capitalizes on the volatility of the interest rate mar- ket. Contrary to this approach, is to have 80% of the investable portfolio maturing in one year, a year in which interest rates might be at an all time low. Then the question becomes, “Where do you invest the proceeds from the maturities?” This could be a very frustrating experience, especially if you are dependent on the in- come generated by your portfo- lio. The laddered approach will as- sure a better than average ap- proach to fixed-income security investing, especially in volatile interest rate markets. This appli- cation may also be applied to government securities, tax free municipal bonds, corporate 80/20 INVESTMENT PORTFOLIO FIXED INCOME, Pci » En i Fd Par Shares oh “Description "Maturity" Rate $20,000 ABC Bank CD oy 2002 3.00% 20,000 US Treasury June 2003 4.00% 20,000 US Savings Bank CDJune 2004 5.00% 15,000 Corp. Bond = June 2005 6.00% EQUITY | | 5,000 Solid Stock Mutual Fund 5,000 Stable Mutual Fund 5,000 Large Cap Mutual Fund 5,000 Blue Chip Index Fund MONEY MARKET Lh | 5,000 Dollar Value Money Market Funds.03% TOTALS $100,000 Market Value * 20,000 20,100 20,000 15,200 5,000 $102,100 (Above securities and corresponding data are fictitious and reprotents a hypothetical portfolio for explanatory purposes only). Laddering is an age-old investment approach which is uncomplicated, suitable to any size portfolio and has a proven track record of satisfying some of the most astute investors. damental investment theories which would prove satisfactory in certain investment situations, there is one elementary principle which many investment advisors subscribe to which has been proven effective, uncomplicated and a sure fire investment ap- proach in many professionally ‘managed portfolios. This fundamental approach is called, “laddering.” LADDERING Laddering is the simple process of dividing fixed income investable funds into investment blocks and then subjecting those blocks to an investment philoso- phy. The overall asset allocation philosophy might be classified as fixed-income, with growth, wherein 80% of the total portfo- lio is allocated to fixed-income and 20% committed to good quality blue chip stocks or mutu- al funds with clearly defined in- vestment objectives. Establishing an investment plan can be archi- tecturally done professionally (the preferred method) or by" yourself. However, the entire process demands considerable time, proper asset allocation modeling and calculations to de- termine the most effective path bonds and other fixed-rate and term instruments. Equities The remainder of the portfolio can be used to provide the poten- tial for long-term principal growth. Certainly the intention here is not to involve investors with speculation, specific stock selection and/or a high degree of Place: snr a sy L —y,L,_n Maryann QUE #2 ET ae (570) 831-2525 or (800) 726-0905 risk, but suggests an investment into a well diversified list of good quality stocks with an above average dividend yield or mutual funds where the fund’s objectives coincide with the in- vestment plan. By taking this ap- proach, the investor has an op- portunity for capital appreciation [Changing Jobs or Retiring? . Protect your 401 (k), 403(b) or other qualified ~ retirement plan distribution in your future plans. Change is exciting but it also can be stressful. So, it’s no surprise that the last thing on your mind is the distribution from your 401(k), 403(b) or other qualified retirement plan. Yet it is critical to protect what you've spen years accumulating — its your future. Learn about the available choices for handling your qualified plan distribution by attenting our free investment seminar. Smart Solutions for Your Retirement Distribution. Find out how to keep your hard-earned savings working for you. Registration & Refreshments: 6:00 p.m. Date: March 27, 2002 Time: Seminar: 6:30 p.m. East Mountain Inn, Route 115, Wilkes-Barre Speaker:David Walsh, Morgan Stanley Services Space is limited, so call to make your reservations Soday, Morgan Stanley ‘Fund brochures containing a prospectus will be available at the seminar. The prospectus contain detailed information about Morgan Stanley Funds, including risks, sales charges and fund expenses. Read the prospectus carefully before you i invest or send money. This seminar is sponsored by "Morgan Stanley, Martz Bldg. 5th Flr., 46 Public Square, Wilkes-Barre Morgan Stanley, 75 Airport Road, Suite 111, Hazleton Fixed income investing in volatile markets and, at the same time, may en- hance the income portion of their portfolio through the receipt of dividend payments and an offset to inflationary trends. A typical laddered, fixed-income, with growth, portfolio would resemble the chart that accompanies this article. ww Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co., Services are offered through Morgan Stanley DW Inc., member SIPC. ©2001 Morgan Stanley Distributors, Inc., distributor Michael W. Duricko, Ph.D. Senior Vice President Eugene C, Cunard Assistant Vice President Choosing a trust and investment advisor is an important decision. It's a personal choice that should result in a relationship that combines confidence, trust and an in-depth understanding of the customer’s needs and goals. Our Star Team, Michael W. Duricko, Ph.D. & Eugene Cunard focus on building relationships which are rewarding to our customers. Call today for a no obligation review of your financial needs. When It Comes To Money Management... Look To The Star, TRUST & INVESTMENT DIVISION 1.866.4STAR.PA
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