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Hello, and welcome to Ask USAA.
My name is Scott Halliwell, and this is
our featured question.
Our question comes to us from Jeff.
And Jeff wants to know, how do I pick a winning investment?
Well, Jeff, I have to assume by winning investment you mean
that you intend to take a lump sum of money, find an
individual investment, and hopefully get a
big return on it.
If that's the case, my answer to the question can be summed
up in just two words, don't try.
Look, I still want you to win.
I still want you to succeed.
But I think there's a better approach to doing this than
trying to pick an individual investment and hope that it
turns out to be a winner.
I think it's more prudent instead to try to build a
portfolio that hopefully will be a winner for you.
That way you spread the risk amongst many different types
of investments instead of lumping it all in one.
Approaching investing this way is typically a much safer way,
much less dangerous way, for the average investor to go.
So how do you go about this?
How do you go about building a portfolio?
By answering a simple equation.
Let me show you what I mean.
If you look at our blackboard here, you'll see the first
step of figuring out the right portfolio for you is
determining your desired rate of return.
Now I know when I share that with people, I often get a lot
of strange looks.
They look at me like, what do you mean?
Of course I'd like to earn as much as I can on my money.
While I certainly understand that desire.
You have to know that there are two sides to that coin.
Generally speaking, higher potential returns equal higher
potential for losses.
That leads us to the next piece of the equation where we
have to add in what is your tolerance for potential lost.
Meaning how much fluctuation, how much volatility, usually
negative volatility, would you be comfortable with and still
be able to sleep at night?
When you combine those two together, you get the
appropriate investment mix for your situation.
So what's the point of this equation?
The point of the equation is if you need a 6% or 8% rate of
return on your money, don't invest it in a way that
historically has done say 10 or 12.
Why not?
Well, it's actually simple.
Because shooting for more could leave you with less
money if the markets don't perform the way
that you had hoped.
Now, let's talk about how you would go about actually
building a portfolio that I've been discussing here.
You can take a look at all the investments that are out
there, and you can put them on a spectrum.
On one end of the spectrum we have lower risk, lower
returning types of investments.
On the other end, we have higher risk and potentially
higher returning types of investments.
Overlaying that with the broad asset classes, you'll see
cash, bonds, and stocks.
Then you can further divide those.
You can take cash and turn it into savings,
money market or CDs.
Bonds typically will include US government bonds, municipal
bonds, and corporates.
And then stocks, you'll see, are usually large cap, mid
cap, small cap, and maybe some international as well.
So going back to the equation that we talked about before,
the idea here is to try to combine these investments in
such a way that historically has allowed you to achieve the
return that you need but done so in a way, in a level of
volatility, that allows you to sleep at night.
If you'd like to get an idea of how this works in practice,
I urge you to check out our portfolio planner tool that we
have on usaa.com.
It will help you address the volatility aspect we just
talked about as well as give you some ideas on how to
construct a portfolio that's suitable for your situation.
You can locate it by typing portfolio planner in the
search box on usaa.com.
One final note here is that it's worth noting that not
even this diversified approach that I've been talking about
guarantees winning results.
Sometimes even the most well thought out investment
strategies implemented at is believed to be the perfect
time can lose money.
A diversified approach, though, is intended to
increase the odds of success for most people.
So, the bottom line here, Jeff, is I think it's better
to have a diversified approach, build a portfolio
instead of putting all your eggs in one investment basket
and hoping that it works.
I thank you an awful lot for the opportunity, though, to
share my insights and advice.
And I hope this helps you out as you try to figure out what
to do with your investing dollars.