A Weak Foundation and Leaky Roof Make for a Shaky Fiscal House

In the 1948 comedy Mr. Blandings Builds his Dream House, Cary Grant and Myrna Loy encounter numerous setbacks and unexpected expenses as they play a hapless married couple overseeing construction of their new home.

Financial professionals often use house construction as a metaphor for building your investment portfolio, only in this case it's a fiscal house and subject to its own set of potential pitfalls. With any luck, though, you’ll fare better than Mr. and Mrs. Blandings – if you have the right plan and the right “materials” for each part of your structure.

Let’s take a look at how to put your fiscal house together:

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Start with a Solid Foundation

When you build a house, if the foundation isn’t sound, the rest doesn’t matter. In a sense, the same can be said for the foundation of your financial plan.

Market storms can create problems with your other investments, so it’s critical to have some stability to fall back on if unfriendly winds blow. This stability could come in the form of a simple savings account, certificates of deposit, fixed-indexed annuities or government bonds protected by the U.S. Treasury. You won’t earn much interest with these – you might even struggle to keep up with inflation – but you won’t lose money. And after all, you need to eat, pay the mortgage, and make sure the power company doesn’t turn off your electricity.

If bad times happen, your financial foundation is there for you.

Add Some Investment ‘Walls’

In an actual house, the walls help protect and insulate you from the outdoors, but in our fiscal house the walls represent the next level of investment risk. Here’s where you should have moderately conservative investments – things that aren’t risk free, but also aren’t super aggressive. You might experience a steady 4% to 6% return on your investment, although remember, losses also are possible.

Investments to consider might include municipal bonds, corporate bonds, private real estate investment trusts and hard assets, such as oil, natural gas, gold, silver, farmland and commercial real estate.

Raise the Roof (and Hopefully Your Investment Gains)

Roofs take a heap of punishment. When the sun isn’t beating down on them, rain and hail are. Roofs can leak, and in some parts of the country a hurricane can blow them right off. But they are also instrumental in protecting the rest of the house from the elements.

In our fiscal house, the roof represents the highest level of risk your portfolio can tolerate – but also the greatest potential for growth. These are the investments where you could experience significant losses – or magnificent gains. This is why it’s important to incorporate into your financial plan design a sound foundation and strong walls. If your roof is ever damaged due to market volatility, it should not cause the entire fiscal house to crumble. Assets that make up the roof may include stocks, mutual funds and exchange-traded funds.

Part of the trick in all this, of course, is deciding just how much of your portfolio should be represented by each of these different components.

We believe most retirees can have some element of risk in their portfolio. Typically we’ll want to use the rule of 100, which ties your age to how risky your investments should be. For example, if you are 65, then 65% of your portfolio should be in safer investments, while 35% should be in more aggressive, “roof”-like assets.

But not every person has the same needs or the same risk tolerances, so talk with a financial professional who can help you decide how to best design your fiscal house.

The ultimate goal, of course, is to increase your odds of enjoying a secure retirement. Even Mr. and Mrs. Blandings eventually enjoyed a happy ending.

Ronnie Blair contributed to this article.