VALUE LINE INVESTMENT EDUCATION: Planning an Investment Strategy

VALUE LINE INVESTMENT EDUCATION: Planning an Investment Strategy

Planning an Investment Strategy

Many people get overwhelmed by the topic of investing 
because they perceive it to be overly complex. On the sur-

face, this may seem to be true, but with a little time spent 
on education and the right tools at your disposal, invest-

ing can be as simple or as consuming as you would like to 
make it. One of the founding principles of Value Line was 
to provide individual investors like yourself with the tools 
to become better investors. When you choose stocks, Value 
Line provides the guidance you need to make your selections.
APPROACHES TO INVESTING
There are many different approaches available to investors. 
You could take on every aspect of the process from buying 
stocks directly from the issuing companies (called direct 
purchase plans) and bonds from the U.S. Treasury, OR 
you could outsource everything by buying a single balanced 
mutual fund or exchange-traded fund (ETF) that owns a 
diversified collection of assets. Of course, there are countless 
variations between the two extremes.
Value Line suggests that you find a happy medium that 
allows you to enjoy the investing experience. After all, if 
you don’t enjoy investing to some degree, it will become 
a chore and, perhaps, eventually fall by the wayside. Since 
you are the only person who can ensure your own financial 
security, it is important that you don’t neglect this vital 
aspect of your life. 
To help keep things “fun,” it is advisable to focus on those 
areas that you find enjoyable and outsource the other func-

tions. Outsourcing in this instance means paying someone 
else to handle a portion of your portfolio or some function 
of investing. For example, you probably don’t want to bother 
with holding your own stock certificates or buying directly 
from companies. In this case, you should use a broker. Ad-

ditionally, you may enjoy buying stocks but not bonds. If 
this is the case, you should purchase individual stocks for 
your portfolio, but buy a mutual fund or ETF that invests

in bonds to round out your portfolio and provide additional 
diversification. 
On the following pages, you will find a questionnaire de-

signed to aid you in determining your personal “investor 
profile.” We’ve included descriptions for each of the nine 
profiles in our model, which you should read to ensure that 
the one you’ve been assigned fits your personal situation. 
Your profile, in turn, fits into one of nine broadly diversified 
portfolios. The general idea is simply to place your eggs in 
many baskets so that dropping any one basket won’t do seri-

ous harm to your portfolio. We’ve created these portfolios 
using historical performance and correlations (similarities 
in price movements) between investment classes. It is im-

portant to remember, however, that historical performance 
is not a guarantee of future returns; another way of looking 
at it is to say that asset allocation is an art and not a science. 
These are broad guidelines that you should feel free to alter 
to your own situation. 
For example, you may not want to segment your U.S. 
equity investing. In this case, you would simply merge the 
appropriate portions of the recommended portfolio (Large 
Cap Growth, Large Cap Value, Small Cap Growth, and 
Small Cap Value) to create one category for U.S. stocks. 
The potential future gains or losses this might involve 
will likely be negligible when compared to the emotional 
benefits you will receive from simplifying your investment 
approach to a level that suits your personality. It is better 
that you should have “fun” than turn investing into an 
easily neglectable chore.
That said, you should not compress things too much. The 
broad categories that you should maintain in some fash-

ion include: U.S. Equities, Fixed Income Securities, and 
at least one additional form of diversifying asset class (for 
example, U.S. Small-Cap Value Stocks, Foreign Equities, 
Foreign Bonds, Emerging Market Equities or Gold/Natural 

Resources—note that we include real estate and real estate 
investment trusts in the Gold/Natural Resources category).
While you could simply divide your portfolio into four equal 
parts, 25% U.S. Equity, 25% Foreign Equity, 25% Fixed 
Income, and 25% diversified assets, such as U.S. Small-Cap 
Value or real estate investment trusts (REITs), this would 
be a very aggressive portfolio that, while diversified, lacks 
individualization—that is to say that it is a useful example, 
but not likely appropriate for most investors. 
Using the four equal parts of your portfolio as a model, 
however, you might decide to handle the U.S. Equity por-

tion of your portfolio and the Small-Cap Value (or REIT, 
if you chose that as your fourth asset class) segment using 
The Value Line Investment Survey, while “outsourcing” the 
rest by purchasing mutual funds you’ve selected utilizing 
The Value Line Fund Advisor. This leaves you primarily re-

sponsible for the day-to-day management of just half your 
portfolio. The other half would require just an annual or 
semi-annual checkup. 
How much of your portfolio to handle personally is your 
decision. Our asset allocation model is open to any level of 
personalization on this front. Again, the goal is to handle as 
much as you feel comfortable with to ensure that you keep 
up with your finances. If you find that you have taken on 
too much, cut back. If you find that you want to do more, 
take on more. The level of your involvement is up to you 
and changeable at any moment. If we haven’t stressed this 
enough already, the key is to make the investment process 
engaging and enjoyable.
DIVERSIFYING AND MAINTAINING 
YOUR PORTFOLIO
Assuming that you handle some portion of your portfolio, 
it is important to discuss diversification. On a broad level, 
owning securities from many different asset classes creates a 
diversified portfolio—for example 25% U.S. Equities/25% 
Foreign Equities/25% Fixed Income/25% Small-Cap Value 
is diversified across four asset classes. However, on an asset 
class level, you still need to think about diversification. 
Using the same portfolio, you could fill in the asset classes 
by purchasing just three stocks and one bond. This might 
seem a ridiculous example, but it is important to point 
out that owning one stock or bond per asset class does 
not provide you with adequate diversification. (Note that, 

generally speaking, mutual funds and ETFs are structured 
to be diversified so that owning one would likely provide 
adequate diversification within an asset class.)
It is advisable that you own at least 15 different securities 
within a number of different industries (or maturities for 
bonds) for whatever asset classes you choose to handle. For 
example, if you were investing 25% of your assets in U.S. 
Equities, Value Line recommends that you own 15 or more 
stocks from at least 10 different industries. We include a 
number of stock screens in the back of each Summary & 
Index section in The Value Line Investment Survey that we 
believe will provide a good starting point for any investor. 
And our five Model Portfolios are another good place to 
start. Further, we suggest that you equally weight the stocks 
(at least at the time of purchase) and “rebalance” the posi-

tions in your portfolio at least annually. By rebalance, we 
mean evening out your positions. It is a form of pushing 
yourself to take some profits on winning positions and to 
maintain diversification.
Rebalancing is an important aspect of asset allocation. You 
should rebalance your entire portfolio back to your original 
allocations (your “model” portfolio) at least once a year. It 
is OK to do so more often, but not advisable to go much 
longer than a year (for taxable accounts, securities with 
gains should not be sold “just under” a year). That said, a 
few percentage points here or there isn’t going to materially 
alter your portfolio’s profile. So, if you were using a model 
of 50% stocks and 50% bonds, being at 52% stocks and 
48% bonds would not be a material deviation. The logic for 
this is that you will be selling assets that have appreciated 
in value and buying ones that have sold off — the old Wall 
Street maxim of buying low and selling high.
Along with rebalancing, there is one more issue to consider 
when maintaining your portfolio: changes in your own 
life. At least every five years you should reexamine your 
life situation to ensure that the model portfolio upon 
which you have based your investments is still appropriate 
to your current situation. Indeed, five years is a long time 
and can be the difference between having children in school 
and children who have started their own families. Such a 
change could make a significant difference to your financial 
life and would need to be addressed in your portfolio. In 
fact, material life changes are a good reason to revisit your 
portfolio structure any time they occur.

VALUE LINE INVESTMENT EDUCATION: Planning an Investment Strategy