Focus on Finance
The Internet Investor Version 1: The Defensive Investor By George Morgan
Changes in technology have led to an explosion in the number of investment options available to the investing public. This gives individual investors the ability to design and execute an investment program that meets their unique financial condition and temperament. The strategies and the investors who implement them run a wide spectrum, from those who are extremely cautious and want to have the whole process managed by a third party to those who will accept significant risk and are willing to take the time and effort to manage the process without professional assistance. My space here is limited, so I can’t cover all three investor Named for the year in which the investor could potentially profiles in a single column. This month, I will discuss version begin utilizing the assets, target-date funds are considered to 1: the defensive investor. Over the course of the next two be extremely long-term investments; thus, low rates of return months, I will explore the profiles of version 2: the involved versus other types of investment must be anticipated. investor and version 3: the enterprising investor. The farther that the target date is in the future, the higher The top priority of defensive investors is to avoid losses the percentage of stocks in the portfolio and, thus, the lower and serious mistakes. They desire to exert as little effort as is the percentage of bonds. As time passes, the percentage of necessary and to make as few decisions as possible. The destocks in the portfolio is decreased and the percent of bonds mographics of defensive investors run the entire gamut, from is increased. Under normal circumstances, the portfolio’s alloyoung to old, from small accounts to major accounts. Some cation of stocks and bonds is adjusted on an annual basis. are professionals and some work There are several things that a blue collar jobs. They can be male defensive investor (or the defenor female, retired or just entering sive investor’s representative) Just like any group of people, investors the work force. Any person with needs to be aware of when purany amount of money to invest chasing target-date funds. First: are not all cut from the same cloth; may have a defensive investor perthe fees. When target-date funds sonality and adopt the defensive were introduced 30 years ago, they therefore, a one-size-fits-all approach investor strategy. charged higher fees than other does not apply to investment strategies. It is not unusual for a defensive mutual funds. However, in today’s investor to turn all decision-makcompetitive environment, those ing responsibility over to a third fees are on the decline. Second: the party. This third party may be a friend, relative, or significant relative proportion of stocks and bonds. Defensive invesother. The third party may also be a financial professiontors may feel safe because of the bond-heavy mix of stock al such as a broker or financial planner. In some cases, the and bonds. However, target-date funds vary dramatically in driving factor motivating the transfer of responsibility is not the type of stocks used in the stock portion of the portfolio. the quality of the investment decisions that the third party Funds that incorporate more aggressive stocks carry a higher is likely to make, but rather the fact that the investor doesn’t risk profile. want to deal with it. If the third party is a not a financial proJust like any group of people, investors are not all cut fessional, they must treat the assets as if they were their own. from the same cloth; therefore, a one-size-fits-all approach Because of their desire to avoid loss, with the underdoes not apply to investment strategies. An effective way to standing that this most likely will result in reduced longfind an investment strategy that is right for you is to begin by term earnings, defensive investors tend to keep a significant deciding which type of investor profile (defensive, involved, portion of their portfolio in either a bond mutual fund or a or enterprising) best describes you. Once that is decided, the money market fund. In both cases, the return is small relative investment strategy that is right for you will fall easily into to the return available in the stock market, but the principal is place. Check this space next month for a profile of version 2: exposed to a much smaller amount of risk. the involved investor. Many of those categorized as defensive investors are Editor’s Note: Professor Morgan has over 40 years’ experience in the investment drawn to target-date mutual funds. These funds are attracfield, both as a university professor and as a financial advisor. He currently serves on tive because they are readily available, inexpensive to hold, the faculty at the University of Nebraska at Omaha, where he directs a program deand simple to monitor. Target-date funds are mutual funds signed to educate 401(k) plan participants on how to improve their investment strategy. that are organized and managed with the owner’s potential The opinions voiced in this material are for general information only and are not retirement date in mind. The objective of a target-date fund is intended to provide specific advice or recommendations for any individual. To deterto maximize the owner’s asset value at the time of retirement mine which investments may be appropriate for you, consult your financial advisor while keeping in mind the owner’s risk-averse personality. prior to investing. 42
April 2021
