Moving ahead: Build a better equity portfolio

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Many investors face a dilemma. They know stocks and stock mutual funds may help them pursue their long-term financial goals, but because equity markets tend to be volatile in the short term, they tend to get skittish and sometimes move in and out of equities. What to do? Rather than shy away from equities and their growth potential when the market heads south, take a strategic approach to building — or rebuilding — your stock portfolio. The following ideas might help you get started.

Look at style

Different styles of stocks and stock mutual funds tend to perform differently. Diversifying your portfolio with growth and value stock investments may help reduce risk: Gains from one may help offset losses in the other, although diversification does not guarantee a profit or prevent a loss.

Focus on long-term returns

Resist the urge to buy or sell specific stocks or funds based solely on short-term performance. Pay more attention to longer-term returns. Evaluating performance over 10 years, for example, may give you a more accurate picture of an investment's risk and return characteristics and potential role in your portfolio than evaluating performance over the past year or two.
Why? Because returns can be affected by a wide variety of economic, political, and market developments, any of which may be subject to change with little notice. Since conditions that influenced performance during recent months may be short-lived, it might not be wise to make long-term investment decisions without a better understanding of a security's track record. Also, remember that past performance is no guarantee of future results.

Examine risk, not just return

Returns alone won't tell you all you need to know. If you're considering a stock fund, for example, you'll want to consider risk-adjusted returns — that is, how much risk a fund took on in order to achieve its returns. You may find that a fund with impressive returns earned them by taking on significantly more risk than other seemingly similar funds. There are risk measurements that can help you make such comparisons. For example, standard deviation is a measurement of how far the price of a stock moves above or below its average value.

Know the leadership team

Here's something else to consider if you're looking at a stock fund: the fund manager or management team. Evaluate the manager's track record and tenure before you invest. If you're considering a fund that recently experienced management changes, examine the credentials of the new manager. Also keep in mind that many funds are managed by teams of professionals, in which case the departure of one team member may not matter as much.
Finally, consider enlisting the aid of a financial professional when selecting investments. In today's complex and fast-changing financial world, a pro can help you narrow down your choices and stay focused on your goals, risk tolerance, and time horizon.

Investing in stocks involves risk, including loss of principal. Individuals should consider their goals, risk tolerance, time horizon, and liquidity needs before investing in securities.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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