Just like a doctor can make a quick assessment of your general health by checking your blood pressure, heart rate and temperature, with just a few quick questions you can get an overview of your personal finance health.

• Housing costs: Your total monthly housing costs, including mortgage or rent, property taxes and insurance shouldn’t exceed 28% of your gross monthly income.
• Debt payments: Look at your monthly payments for housing, loans and credit card debt. You should be spending no more than 36% of your gross monthly income on these bills.
• Emergency savings: You should maintain an emergency account with a balance equal to three months of expenses. If your household includes children or is supported by only one income, double that.
• Investment portfolio: The younger you are, the more risk you can afford to take in the stock market. As you get closer to retirement age, your portfolio should be weighted more heavily toward bonds. Deduct your age from 120; that’s the percentage of your portfolio that should be invested in stocks.
• Company stock: Maintain a diversified stock portfolio. Take advantage of an opportunity to buy you employer’s stocks, but don’t go over 10% of your total stock portfolio.
• Life insurance: Multiply your annual salary by five to determine your life insurance needs. If you have several children or a lot of debt, double that. If, however, you have no young children or debts, you can do without entirely.
• Retirement savings: Apply these general rules of thumb: If your employer matches your 401(k) contributions, contribute the maximum amount. Take advantage of any tax-deferred retirement accounts you can. If you’re conflicted about whether to save more for retirement or for your child’s college education, choose retirement; there are no retirement scholarships.

There are no rock ribbed personal finance rules, but tending to these seven areas of personal finance will go a long way to ensuring your security and your family’s. For more information on retirement planning, consult with a personal finance advisor.


 

In these blogs, I talk off and on about the importance of not having all of your investment eggs in one basket. Too many investors, unfortunately, put all of their money into last year’s highest performer and cross their fingers. That's a losing strategy, and if you don't believe me, ask an Enron investor.

What such investors really need is a tried and true technique for investing successfully—diversification. Doing so is one of the best ways to protect your investment portfolio from the pendulum swings of the economy and the markets. Simply defined, diversification has you divide your investments across different types of assets. Since a separate account portfolio may invest in different securities, a decline in the value of one security may be offset by the rise in the value of another.

While there have been hundreds of books written on the right way to diversify a portfolio, no one of them can possibly provide you with a perfect understanding of what it takes. What I can try to do here is educate you on the basics, including how diversification works and  why it’s important.

Some background first. Wall Street pundits say they divide the history of investing in the United States into two periods: before and after 1952. In that year, University of Chicago economic student Harry Markowitz published his doctoral thesis – a thesis that would make up the foundation for his breakthrough treatise on investing called Modern Portfolio Theory. Markowtiz’ paper caused such a stir and impacted so many investors that he won a Nobel Prize in economics in 1990.

What is modern portfolio theory? In Markowitz’ view, ground zero for investors is avoiding risk at all costs.  Markowitz defines risk as a "standard deviation" of expected returns.

Loosely translated, instead of considering risk on a single security level, Markowitz emphasizes measuring the risk of an entire portfolio. When considering a security for your portfolio, don't base your decision on the amount of risk that carries with it. Instead, consider how that security contributes to the overall risk of your portfolio.

Markowitz then considers how all the investments in a portfolio can be expected to move together in price under the same circumstances. This is called "correlation," and it measures how much you can expect different securities or asset classes to change in price relative to each other.

For instance, high fuel prices might be good for oil companies, but bad for airlines that need to buy the fuel. As a result, you might expect that the stocks of companies in these two industries would often move in opposite directions. These two industries have a negative (or low) correlation. You'll get better diversification in your portfolio if you own one airline and one oil company, rather than two oil companies.

When you put all this together, it's entirely possible to build a portfolio that has much higher average return than the level of risk it contains. So when you build a diversified portfolio and spread out your investments by asset class, you're really just managing risk and return.

Markowitz has a good point about risk, and its implicit partnership with diversification. After all, everybody’s heard the stories. How the guy at the gym or the lady at the hair salon made a fast killing on last year’s stock picks—or a friend tripled his “investment” one 
morning at the horse track. These are all well and good, but they’re stories about gambling, not investing—risky business that’s fine for entertainment if you can afford it, but not for financial planning. That’s because basing your financial decisions on guesswork not only 
prevents you from growing your money, but also increases your risk for losing it.

Which is one of the many reasons why I like diversification: it’s a technique that, combined with rebalancing, removes the guesswork and emotion from investing.

On Wall Street, you often hear the big money guys talking about "bullet-proofing" their portfolios.

In other words, designing your investment portfolio in such a way that even if your portfolio takes a body blow, it's easily absorbed with minimal damage to your investment assets. No investment plan is immune to losses – the idea is to limit those losses so they don't destroy your financial future.

Make no mistake, protecting your portfolio should be job one for investors, if only for good peace of mind. Research indicates that a loss causes about twice as much pain as a gain causes pleasure. During periods of market volatility, investors experience the sense of loss more acutely. For anyone with short memories, the bear market of 2000-2002 is a vivid example of that.

One example of bulletproofing your portfolio comes in the form of "Hurricane-Resistant" investment portfolios.

Remember Katrina? We all do. It wreaked billions of dollars of damage along the U.S. Gulf Coast in August, 2005. But some saw opportunity in tragedy. Writes Adam Shell, in a USA Today piece shortly after
hurricanes Katrina and Rita hit, "ever since Hurricane Katrina crashed into the Gulf Coast on Aug. 29, nimble traders and money managers have been reshaping their portfolios in an attempt to sidestep — and profit from — the potentially devastating one-two punch packed by Katrina and Rita."

In this case it's the notion that some industries and companies will profit handsomely from the damage inflicted by Mother Nature. Andrew Corn, CEO of Clear Asset Management told USA Today in the same story: "Like most tragedies, there is a silver, or in this case, a golden
lining."

This year the U.S. Weather Service is forecasting a big uptick in hurricane activity in the Western Atlantic, with the possibility of a whopping five "major" hurricanes reaching U.S. shores. Of course, I hope that doesn't happen. Lives will be lost, as will homes and livelihoods. But if it does, and you care to profit from it, there is a plan.

The key in building hurricane-proof portfolios is to pick the sectors - and the companies within those sectors – that are poised to profit from natural disasters. Obviously, construction and home repair providers - -think Lowes or Home Depot - -might be a natural for a disaster-proof stock portfolio. Energy and utility companies can fill a niche, too.

Even clothing retailers tend to do well in natural disasters. Companies like Abercrombie & Fitch and The Gap are often the first places shoppers go to replace - -what else? - - their clothing lost to a hurricane or other natural disaster.

While no actual hurricane mutual fund exists today, it's highly possible to cherry pick the companies you think will grow and prosper even as most others wither on the vine after a natural disaster like Katrina or Rita.

Remember, there's really no avoiding the ebbs and flows of stock market performance. Hits are inevitable and typically occur because of a bear market, a recession, inflation fears, or a currency problem. That's why the goal is to build-in protection for your capital, maybe even make a profit even when traditional portfolios are spiraling downward and still be able to beat or keep up with the markets when they are rallying.

That's why bulletproofing your portfolio is so critical – it protects you and your money and creates more opportunities to grow your investment portfolio.

Even after a hurricane.