Tag Archives: asset allocation strategy

Recovery of Emerging Markets

The MSCI Emerging Markets Index, up 28.09%, is the best performing major index year-to-date – better than the DASDAQ, better than the S&P 500, better than the DJIA.  That’s an amazing reversal.

Emerging Markets have lagged the other major indexes over the last decade.

  • 2.21% for 3 years (vs. 9.57% for the S&P 500)
  • 5.56% for 5 years (vs. 14.36% for the S&P 500)
  • 2.76% for 10 years (vs. 7.61% for the S&P 500)

Why do we mention this?  A well diversified portfolio often includes an allocation to Emerging Markets.  Emerging Markets represent the economies of countries that have grown more rapidly than mature economies like the US and Europe.

Countries in the index include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, and the United Arab Emirates.  Some of these countries have economic problems but economic growth in countries like India, China, and Mexico are higher than in the U.S.

Between 2003 and 2007 Emerging Markets grew 375% while the S&P 500 only advanced 85%.  As a result of the economic crisis of 2008, Emerging Markets suffered major losses.  It is possible that these economies may now have moved past that economic shock and may be poised to resume the kind of growth that they have exhibited in the past.  Portfolios that include an allocation to Emerging Markets can benefit from this recovery.

Tagged , , ,

What does “diversification” mean?

 

Diversification is key - Wealth Foundations

To many retail investors “diversification” means owning a collection of stocks, bonds, mutual funds or Exchange Traded Funds (ETFs).  But that’s really not what diversification is all about.

What’s the big deal about diversification anyhow?

Diversification means that you are spreading the risk of loss by putting your investment assets in several different categories of investments.  Examples include stocks, bonds, money market instruments, commodities, and real estate.  Within each of these categories you can slice even finer.  For example, stocks can be classified as large cap (big companies), mid cap (medium sized companies), small cap (smaller companies), domestic (U.S. companies), and foreign (non-U.S. companies).

And within each of these categories you can look for industry diversification.  Many people lost their savings in 2000 when the “Tech Bubble” burst because they owned too many technology-oriented stocks.  Others lost big when the real estate market crashed in late 2007 because they focused too much of their portfolio in bank stocks.

The idea behind owning a variety of asset classes is that different asset classes will go in different directions independent of each other.  Theoretically, if one goes down, another may go up or hold it’s value.  There is a term for this: “correlation.”  Investment assets that have a high correlation tend to move in the same direction, those with a low correlation do not.  These assumptions do not always hold true, but they are true often enough that proper diversification is a valuable tool to control risk.

Many investors believe that if they own a number of different mutual funds they are diversified.  They are, of course, more diversified than someone who owns only a single stock.  But many funds own the same stocks.  We have to look within the fund, to the things they own, and their investment styles, to find out if your funds are merely duplicates of each other or if you are properly diversified.

You need to look at a “portfolio x-ray” which will show you how much overlap there is between two or more mutual funds.

Only by looking at your portfolio with this view of diversification can you determine if you are diversified or if you have accidentally concentrated your portfolio without realizing it.

Tagged , , , ,

Buy low and sell high

Remember the old adage about how to make money in the stock market? It’s “buy low and sell high.”

This is done over the long-term on a regular basis if you are disciplined and adhere to an asset allocation strategy.

Assume that your ideal portfolio is 50% stocks and 50% bonds. If stocks have a good run and the stock portion grows to 60% and bonds are now 40% you sell some of the stocks that have given you a nice profit and bring the portfolio back into the 50/50 balance.

Suppose the opposite happens: the stock market declines and the portfolio now consists of 40% stocks and 60% bonds. Now you sell some of the bonds to buy more cheap stocks, bringing the balance back to 50/50.

In this way it’s possible that you can make a fair return on your portfolio even if – over the long term – neither the stock or bond market actually rises but simply fluctuates.

For disciplined long-term investors, this shows “the importance of continuing to invest when the annual return stream is uneven and especially when stocks are down,” writes Carlson, an investment analyst at the Van Andel Institute in Grand Rapids, Mich. …

In plainer terms, a steady infusion of capital in good times and bad is better for portfolio performance than turning the spigot on and off in reaction to the inevitable ups and downs of the bourse. For Carlson, discipline in bear markets is more important than “optimizing” externals such as investment costs and tax efficiencies for separating “successful investors from the crowd.”

Interested in a disciplined approach to investing?

Tagged , , , , , , , ,
%d bloggers like this: