Last week I heard from a client who just got a million dollars from cashing out his company’s stock options. Since he had over a million dollars to invest, he wanted to diversify the assets wisely. He pointed out that he had made so much money because it was all invested in one stock, which had skyrocketed in value. But since he was afraid his fortune could disappear overnight if that one company crashed, he wanted to spread out the risk.
First… the plan
We started by examining his assets, including American IRA and brokerage accounts as well as his Israeli savings. We discussed his current budget and future cash flow needs. Then, we talked about what he expected to get from his pensions when he retired. Based on an analysis of his financial situation, he ultimately decided to put about 60% of his million dollars into equities (stocks).
How to decide which stocks to buy
There are many ways to get into the stock market. The most common are:
- Choose a mutual fund or money manager to make the specific choices.
- Choose several index funds that track specific stock markets or sectors.
- Choose individual companies that you believe will continue to perform well.
Each way has its own pros and cons
Having professionals oversee your stock portfolio takes the day-to-day responsibilities off of you. However, there are costs for hiring the managers and no guarantees of improved results.
Alternatively, you could select index funds that mirror the market, which is a low-cost way of investing. Since there are thousands of index funds on the market, which should you buy?
The average person’s investment portfolio should not include only individual companies, since with individual companies it is hard to properly diversify. In most cases, people who try to act as their own money managers underperform the markets.
In many cases, as with this client, I normally advise using different approaches for different parts of the portfolio since there’s no one right answer for everyone.
If you’re struggling with diversifying your portfolio, read this: Profile-Financial.com/asset-allocation and then call for more help: (02) 624-2788.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published May 2, 2019. Updated April 2021.