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Asset Allocation

Fundamentally Weighted ETF’s

We are constantly on the lookout for ways to both diversify our portfolios, while simultaneously improving the risk adjusted return. ETF’s have many advantages over traditional mutual funds, e.g. the ability to trade interday, no early redemption fees, low cost structures, and are not typically tied to the track record of an individual fund manager. This last advantage is a result of the fact that ETF’s are typically set up to track some type of passive index, limiting the ability of a fund manager to add (or subtract) value with his stock picking abilities.

Measuring Portfolio Risk - Risk Measurement for an Average Investor

In some other articles we discuss the impact that risk can have not only on your ability to invest with a system, but highlighted the fact that the risk of the portfolio can have more impact on the sustainable withdrawal rate than the actual average rate of return.

Building a Diversified Portfolio - The Best Mutual Funds

In another article we looked at managing risk (as measure by the standard deviation of returns) by combining funds in our portfolio that were uncorrelated, (that is they don’t track each other very well on a day to day basis.)

How does this work out when applying it to a typical mutual fund portfolio?

Let’s start by taking a quick look at one of the standard examples.

Our Best Diversified Mutual Fund Allocation

Here we take a look at techniques you can use to build our best diversified mutual fund allocation, which helps manage the risk in your mutual fund portfolio.

In other articles we found that using uncorrelated funds assembled in a portfolio gave us a powerful tool to manage risk, while maintaining good portfolio returns.

Finding the Best Mutual Funds for Diversification

Finding the best mutual funds for diverifying your portfolio is a little tricky these days. If you’ve done any reading or watched any TV on the topic of investing, you’ve undoubtedly run into the topic of diversification, and heard how important it is.

It’s often the only real form of portfolio risk management that is generally recommended in the popular press, but it seems to often that folks write about it without really comprehending what makes it work. While the math can get complex, the basic ideas behind diversification are simple enough to follow.

Fund Correlation Calculator to Build a Truly Diversified Portfolio

In another article we discussed measuring risk using standard deviation. Here we will spend just a little more time to introduce the magic of statistics and how understanding standard deviation and other simple statistical measures can reduce your portfolio risk.

What is correlation? Simply put, it’s a measure of how closely two investments track one another. The unit of measure is the correlation coefficient, which can vary in magnitude from 0 (not correlated at all) to 1 (exactly tracking).

Gold ETF Funds and Gold Mutual Funds - Diversifying Portfolios with Gold

Gold ETFs and gold mutual funds can add some needed diversification to your portfolio. In our series on building high return, low risk portfolios, we have learned that an asset class can be of value to our portfolio if it add to the return, or if it is sufficiently uncorrelated to the rest of the portfolio to reduce the risk without reducing the returns.

One common piece of investment advice is to add precious metals, often specifically gold, to your portfolio as a way to hedge or reduce the overall risk of the portfolio. The rationale, of course, is that gold often moves in the opposite direction of the overall market, as when there is a great deal of uncertainty, or the fear of inflation, or even something as severe as the threat of war, then gold will often move up in value.

A Coal ETF - A New Commodity Based ETF in Energy

We have previously taken a look at a handful of commodity based ETFs as a way to diversify your investing portfolio. One of the problems with commodity based ETF’s to this point has been that the choices aren’t really representative of the wide range markets represented by the commodity markets. But that is changing over time, for example a new coal based ETF recently caught our eye.

Gold Mutual Funds - Are They as Good As Gold?

In a previous post, we talked some about the options mutual fund investors had for investing in gold mutual funds. It turns out there are several options we have, and they are a powerful vehicle for adding diversification to your overall mutual fund portfolio. We covered the diversification effects of gold mutual funds previously, but this study focused on funds using gold stocks, primarily gold mining stocks. But we often get questions related to the performance of gold funds, and how correlated they are to the actual price of gold.

Foreign Currency ETFs - A Look at Foreign Currency Fund Choices

What is a foreign currency ETF or exchange traded fund? The first foreign currency ETF was offered by Rydex in 2005, traded as FXE, and it tracks the European Euro against the US dollar.

Now you should be aware that when you are involved in currency trades, you are actually participating in a market that is much larger than the US stock market. The Forex, or foreign currency exchange market dwarfs the US stock market, and is probably the largest financial exchange in the world.

Stocks vs Bonds - How Much Should You Invest in Stocks vs Bonds

In a previous article we examined whether stocks are riskier than bonds, concluding that they are, but it is also a function of how you hold bonds, whether individual bonds or bond funds. Given that there is a tradeoff of risk between stocks and bonds, the natural question to ask next is how much you should invest in stocks versus bonds. For example, the conventional wisdom is that it should be a function of your age, as we expect your appetite for risk to diminish over time.

Oil Stocks - How to Invest in Oil Stocks

Should I invest in oil stocks?

That’s a question that a lot of investors have been asking themselves over the last couple of years. The fundamentals of the oil stocks story aside, the case can be made that investing in oil stocks is a reasonable way for the average investor to hedge his individual energy costs (like the price of a tank of gas or your electric bill) with part of their portfolio. It’s interesting that paying an extra $5 a tank at the pump doesn’t feel so bad if you have oil stocks in your portfolio that have just gone up 5% as well. And many average investors can’t trade crude oil directly.

Of course, these are some of the most volatile stocks around, and many of the penny stocks are associated with the energy industry as well. So, how best to invest in oil stocks?

Stocks vs Bonds - Are Stocks Riskier than Bonds?

One of the most common issues that you will have to deal with when building your investment portfolio is the tradeoff of stocks vs bonds in your investment mix. The conventional wisdom regarding stocks vs bonds is that stocks are riskier than bonds. Let’s take a look at the background information that supports that conclusion, and see if it applies to your investment portfolio.

The primary advantage to bonds is that they have a fixed maturity and, ignoring the potential for the company going bankrupt, you know exactly how much money you will be getting and when. But this is only true if you hold the bonds to maturity. For a 30 year bond, that’s quite a commitment. But this is the basic assumption that is underlying the ideal that stocks are riskier than bonds.

Gold Mutual Funds to Diversify Your Portfolio

In a previous article on gold mutual funds, we explored the impact that holding a postition in gold mutual funds could have on the volatility and risk of your overall portfolio. The impact was not as great as you would think given the standard advice to hold a metals position to diversify your portfolio.