1. Created by Mariusz Wojtowiec
www.successwithmario.com

2. The reason people assume the risks of investing in the first place is the prospect of achieving
a higher rate of return than is attainable in a risk free environment…i.e., an FDIC insured bank
account. Risk comes in various forms, but the average investor’s primary concerns are “credit” and
“market” risk… particularly when it comes to investing for income. Credit risk involves the ability of
corporations, government entities, and even individuals, to make good on their financial
commitments; market risk refers to the certainty that there will be changes in the Market Value of
the selected securities. We can minimize the former by selecting only high quality (investment
grade) securities and the latter by diversifying properly, understanding that Market Value changes
are normal, and by having a plan of action for dealing with such fluctuations. (What does the bank
do to get the amount of interest it guarantees to depositors? What does it do in response to higher
or lower market interest rate expectations?)
You don’t have to be a professional Investment Manager to professionally manage your
investment portfolio, but you do need to have a long term plan and know something about Asset
Allocation… a portfolio organization tool that is often misunderstood and almost always improperly
used within the financial community. It’s important to recognize, as well, that you do not need a
fancy computer program or a glossy presentation with economic scenarios, inflation estimators,
and stock market projections to get yourself lined up properly with your target. You need common
sense, reasonable expectations, patience, discipline, soft hands, and an oversized driver. The K. I. S.
S. Principle needs to be at the foundation of your Investment Plan; an emphasis on Working Capital
will help you Organize, and Control your investment portfolio.
Planning for Retirement should focus on the additional income needed from the investment
portfolio, and the Asset Allocation formula [relax, 8th grade math is plenty] needed for goal
achievement will depend on just three variables: (1) the amount of liquid investment assets you are
starting with, (2) the amount of time until retirement, and (3) the range of interest rates currently
available from Investment Grade Securities. If you don’t allow the “engineer” gene to take control,
this can be a fairly simple process. Even if you are young, you need to stop smoking heavily and to
develop a growing stream of income… if you keep the income growing, the Market Value growth
(that you are expected to worship) will take care of itself. Remember, higher Market Value may
increase hat size, but it doesn’t pay the bills.
First deduct any guaranteed pension income from your retirement income goal to estimate
the amount needed just from the investment portfolio. Don’t worry about inflation at this stage.
Next, determine the total Market Value of your investment portfolios, including company plans,
IRAs, H-Bonds… everything, except the house, boat, jewelry, etc. Liquid personal and retirement
plan assets only. This total is then multiplied by a range of reasonable interest rates (6%, to 8% right
now) and, hopefully, one of the resulting numbers will be close to the target amount you came up
with a moment ago. If you are within a few years of retirement age, they better be! For certain, this
process will give you a clear idea of where you stand, and that, in and of itself, is worth the effort.
Organizing the Portfolio involves deciding upon an appropriate Asset Allocation… and that
requires some discussion. Asset Allocation is the most important and most frequently
misunderstood concept in the investment lexicon. The most basic of the confusions is the idea that
diversification and Asset Allocation are one and the same. Asset Allocation divides the investment
portfolio into the two basic classes of investment securities: Stocks/Equities and Bonds/Income
Securities. Most Investment Grade securities fit comfortably into one of these two classes.
Diversification is a risk reduction technique that strictly controls the size of individual holdings as a
percent of total assets. A second misconception describes Asset Allocation as a sophisticated

3. technique used to soften the bottom line impact of movements in stock and bond prices, and/or a
process that automatically (and foolishly) moves investment dollars from a weakening asset
classification to a stronger one… a subtle "market timing" device.
Finally, the Asset Allocation Formula is often misused in an effort to superimpose a valid
investment planning tool on speculative strategies that have no real merits of their own, for
example: annual portfolio repositioning, market timing adjustments, and Mutual Fund shifting. The
Asset Allocation formula itself is sacred, and if constructed properly, should never be altered due to
conditions in either Equity or Fixed Income markets. Changes in the personal situation, goals, and
objectives of the investor are the only issues that can be allowed into the Asset Allocation decision-
making process.
Here are a few basic Asset Allocation Guidelines: (1) All Asset Allocation decisions are based
on the Cost Basis of the securities involved. The current Market Value may be more or less and it
just doesn’t matter. (2) Any investment portfolio with a Cost Basis of $100,000 or more should
have a minimum of 30% invested in Income Securities, either taxable or tax free, depending on the
nature of the portfolio. Tax deferred entities (all varieties of retirement programs) should house the
bulk of the Equity Investments. This rule applies from age 0 to Retirement Age – 5 years. Under age
30, it is a mistake to have too much of your portfolio in Income Securities. (3) There are only two
Asset Allocation Categories, and neither is ever described with a decimal point. All cash in the
portfolio is destined for one category or the other. (4) From Retirement Age – 5 on, the Income
Allocation needs to be adjusted upward until the “reasonable interest rate test” says that you are
on target or at least in range. (5) At ret
Controlling, or Implementing, the Investment Plan will be accomplished best by those who
are least emotional, most decisive, naturally calm, patient, generally conservative (not politically),
and self actualized. Investing is a long-term, personal, goal orientated, non- competitive, hands on,
decision-making process that does not require advanced degrees or a rocket scientist IQ. In fact,
being too smart can be a problem if you have a tendency to over analyze things. It is helpful to
establish guidelines for selecting securities, and for disposing of them. For example, limit Equity
involvement to Investment Grade, NYSE, dividend paying, profitable, and widely held companies.
Don’t buy any stock unless it is down at least 20% from its 52 week high, and limit individual equity
holdings to less than 5% of the total portfolio. Take a reasonable profit (using 10% as a target) as
frequently as possible. With a 40% Income Allocation, 40% of profits and dividends would be
allocated to Income Securities.
For Fixed Income, focus on Investment Grade securities, with above average but not
“highest in class” yields. With Variable Income securities, avoid purchase near 52-week highs, and
keep individual holdings well below 5%. Keep individual Preferred Stocks and Bonds well below 5%
as well. Closed End Fund positions may be slightly higher than 5%, depending on type. Take a
reasonable profit (more than one years’ income for starters) as soon as possible. With a 60% Equity
Allocation, 60% of profits and interest would be allocated to stocks.
Monitoring Investment Performance the Wall Street way is inappropriate and problematic
for goal-orientated investors. It purposely focuses on short-term dislocations and uncontrollable
cyclical changes, producing constant disappointment and encouraging inappropriate transactional
responses to natural and harmless events. Coupled with a Media that thrives on sensationalizing
anything outrageously positive or negative (Google and Enron, Peter Lynch and Martha Stewart, for
example), it becomes difficult to stay the course with any plan, as environmental conditions change.

4. First greed, then fear, new products replacing old, and always the promise of something better
when, in fact, the boring and old fashioned basic investment principles still get the job done.
Remember, your unhappiness is Wall Street’s most coveted asset. Don’t humor them, and protect
yourself. Base your performance evaluation efforts on goal achievement… yours, not theirs. Here’s
how, based on the three basic objectives we’ve been talking about
Base Income includes the dividends and interest produced by your portfolio, without the
realized capital gains that should actually be the larger number much of the time. No matter how
you slice it, your long-range comfort demands regularly increasing income, and by using your total
portfolio cost basis as the benchmark, it’s easy to determine where to invest your accumulating
cash. Since a portion of every dollar added to the portfolio is reallocated to income production, you
are assured of increasing the total annually. If Market Value is used for this analysis, you could be
pouring too much money into a falling stock market to the detriment of your long-range income
objectives.
Profit Production is the happy face of the market value volatility that is a natural attribute of
all securities. To realize a profit, you must be able to sell the securities that most investment
strategists (and accountants) want you to marry up with! Successful investors learn to sell the ones
they love, and the more frequently (yes, short term), the better. This is called trading, and it is not a
four-letter word. When you can get yourself to the point where you think of the securities you own
as high quality inventory on the shelves of your personal portfolio boutique, you have arrived. You
won’t see WalMart holding out for higher prices than their standard markup, and neither should
you. Reduce the markup on slower movers, and sell damaged goods you’ve held too long at a loss if
you have to, and, in the thick of it all, try to anticipate what your standard, Wall Street Account
Statement is going to show you… a portfolio of equity securities that have not yet achieved their
profit goals and are probably
Working Capital Growth (total portfolio cost basis) just happens, and at a rate that will be
somewhere between the average return on the Income Securities in the portfolio and the total
realized gain on the Equity portion of the portfolio. It will actually be higher with larger Equity
allocations because frequent trading produces a higher rate of return than the more secure
positions in the Income allocation. But, and this is too big a but to ignore as you approach
retirement, trading profits are not guaranteed and the risk of loss (although minimized with a
sensible selection process) is greater than it is with Income Securities. This is why the Asset
Allocation moves from a greater to a lesser Equity percentage as you approach retirement.
So is there really such a thing as an Income Portfolio that needs to be managed? Or are we
really just dealing with an investment portfolio that needs its Asset Allocation tweaked occasionally
as we approach the time in life when it has to provide the yacht… and the gas money to run it? By
using Cost Basis (Working Capital) as the number that needs growing, by accepting trading as an
acceptable, even conservative, approach to portfolio management, and by focusing on growing
income instead of ego, this whole retirement investing thing becomes significantly less scary. So
now you can focus on changing the tax code, reducing health care costs, saving Social Security, and
spoiling the grandchildren.
www.successwithmario.com