Posts Tagged ‘Diversification’

REITs Offer Portfolio Diversification Over Long Investment Horizons – Case on Correlation Trends

www.reit.com NAREIT Senior Vice President of Research and Industry Information Brad Case researched the correlation between REITs and the broader stock market and found that REITs continue to be a great source of portfolio diversification. “When you look at REIT returns over one-quarter periods, or two-quarter periods or three or four-quarter periods, the correlation between REITs and the rest of the stock market actually goes down when you have longer investment horizons,” Case said. The reason for that, Case said, is in part because many REIT investors are using ETFs or mutual funds that also include non-REIT stocks. For example, Case said REITs are classified within the financial sector even though they are not really financial companies. “That means if other investors are trading a financial sector ETF or mutual fund on the basis of information about, for example, banks that may cause the short-term correlation between REITs and the rest of the stock market, including banks, to be high,” Case said. “But then, knowledgeable investors will recognize that REITs may be under-priced or over-priced because they have been pulled in one direction or the other by non-REIT information. That gives investors a chance to make money by trading REITs back to where they should be regardless of what is happening with the rest of the stock market.” Case said correlations increase with every other part of the stock market over longer-term investment horizons. He said that means as …
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Scottrade IRA diversification Allocation International or emerging help?

Question by Ovniologo: Scottrade IRA diversification Allocation International or emerging help?
I choose Scottrade for my IRA because there are no annual fees and they have a selection of free mutual funds. I found a decent Large, Mid cap and bond fund with low fees and no transaction fees but I’m trying to put 10% in International or something different most likely international from Large and Mid in the US I have seen Small caps and they have done not very good in the past 10 years. Using the fund screener the most decent International with a .60 fee is DIISX I don’t like the last 10 years performance but you know how they say past performance doesn’t mean yara yara yara.. Should I open another IRA with Vanguard just to buy a better decent manager controlled International or emerging market flavor or should I stick in International Index and prey?
What is your suggestion for a broker for IRA an outsider like Scottrade or the company?
What is your recommendation of expenses for 5 different mutual funds no more than 2% fee total?

Best answer:

Answer by Common Sense
Dreyfus is one of the most mediocre Mutual Fund companies out there. Chasing mostly past performance will ultimately get you in trouble (I know that’s counter-intuitive). Morningstar doesn’t even have a write-up on this fund (yes… it’s rated 3 stars….. but that’s the free service. I pay $ 175 a year for the premium service. Fund screeners with brokers is a terrible way to find good funds.

DON’T FORGET…… 2007-3/2009 will have a terrible effect (distorting) on the numbers for a 10 year performance. Your goal is to find the next best fund (in a category) for the coming 10 years. The past 10 years could distort the future possibilities. Part of what makes a makes a fund “good” is the style…. what was a good style for the last 10 years…. may not be the style for the coming 10 years. Vanguard is better than Dreyfus (on every level)… but they have a mediocre reputation for international performance (much better than Dreyfus though). Do not index for international investments).

Having the right asset allocation is more important than picking the “right” funds. So although I would never use Dreyfus…… your big mistake is the asset allocation.

First off unless you’re in retirement now….. putting 10% into International is simply the wrong move. 5%-10% in emerging markets with another 15%-20% in regular international funds would make more sense.

I don’t have the time to get into how to invest…. so my strong suggestion to you is to read 2-3 good books. Start off with Mutual Funds For Dummies…. it goes into asset allocation…. which will be a life saver for you.

Here’s some great funds (with companies that are well known for good international funds);
* Dodge & Cox International DODFX
* Oakmark International OAKIX
Artisan International Inv ARTIX
Harbor International Growth Inv HIIGX
* Masters’ Select International MSILX
(these are all taken from the Morningstar paid service, for the best in the International category.
* = funds I have.

Picking Scottrade as a broker was not the best pick…. but believe me… you’ve done better than most choices. Try to keep your funds at one or two intuitions. That may mean a higher fee to get into a fund (like Dodge & Cox) @ Scottrade (If these are funds you’ll be dollar cost averaging into….. then you are better off at the fund company).

What do you think? Answer below!

Diversification In Mutual Funds

Investment funds which focus on all the international securities all around the world are termed as International Mutual Funds. We buy all different products for our shop, so that every buyer is attracted for buying different products. In the same Mutual Fund Diversification is termed as one of the key concept for investment in the mutual funds. There are many assets in the market that you can buy to increase your assets. Gold, real estate, oil and many more shares can help you to increase your assets in the market.

However, you should be smart enough to understand how to manage the total risk in your investment. Mutual Fund diversification is a better option if you want to minimize the risk of loss because it helps you to safeguard your capital providing you a long term security/ It helps in the case if one of your assets don’t perform well in the market, so by investing through mutual fund diversification you can easily through the other investments. So you can easily compensate your loss by the profit earned. Although, the earning are less through this investment but you could have assured security

In India, the Mutual Fund Industry has gone through different stages of development before reaching to its peak-point. For benefiting every businessmen Indian government and Reserve Bank of India (RBI) developed Unit Trust of India in 1963, which gave a new definition to the mutual fund investment. During the late 1996, businessmen begun to invest in the Investment Mutual Fund Industry and the rate of growth in this sector were so high that it led to the creation of SEBI Regulations which had its own norms and conditions related to mutual funds Industries in the country.

In this, fund manager is provided with different tasks related to the portfolio of different level of investors. Mutual Funds are very cost-effective profit yielding way to invest the capital in the high amount and it is designed such that every business can invest his funds to the manager to make a purchase of the share and stocks. The businessmen who are not associated with the concept of the stock market prefer this kind of investment in majority.

When investing in the mutual fund there is no restriction i.e. you can deposit as much as you want. However, when you invest such a high amount of capital you should diversify your money because it provides more protection to your capital. For instance, if you invest your all money in one investment firm and the company owners announces some new policies which can lead to your great loss without having any fault.

Economic conditions also plays a major role in the investment risks, such as if the rates of currency grow with the conditions you could be profit but in other case it could lead to your big loss. It is expected to get lower rate if the rate of Rupee goes up in comparison of the value of the Dollar. Therefore, for minimizing the investment risks most of the investors like to invest in the international market.

The major performers, of June 2010 are Ing Russell Glbl Large Cap, Z Seven, Morgan Stanley Pacific Growth and van Kampen Global. So it has become one of the clear fact if you are going to invest in the domestic market you will not get the much high rates as well they have high chances of falling. Mutual Diversification is a smart alternative to invest your money and keep it safe as well as increasing, whether you invest in domestic market or non-domestic market.

Investment Diversification With Commodity Mutual Funds

As the old saying goes, don’t put all your eggs in one basket. The same is true with your money.  Don’t put all your investment money in one stock, or even the same sector of stocks.  Investment diversification is an easy concept to understand. What’s not easy is deciding where to spread your money.  And for various reasons most people don’t consider commodity mutual funds.

Most people tend to put all their investment or retirement money in the stock market.  They either invest in the company they work for, or buy stocks of companies that they like, such as Ford, GM,  Wal-Mart, or any company that is popular.  Or they are using a brokerage house for advice and pick and choose from the brokers suggestions.  If they have a large sum of money in investments, they probably have a financial counselor. This advisor should have some of their money in the bond market, which is a good, sound investment diversification strategy.

The stock market is easy to understand and most people are comfortable with checking their stock’s performance online. The bond market is a little tougher to follow day to day, and most people just buy the bond and wait for their broker or adviser to recommend a change. 

The commodity and commodity mutual fund market is a little tougher to follow and to understand. The prices of gold and oil are easy to follow because they are a couple of the most popular commodities. The prices of corn, cotton or pig bellies are not so popular. Unless you are a producer or buyer of these commodities you probably don’t have a clue what their price is.

But commodity mutual funds are a great tool to add investment diversification to any portfolio. They offer investment protection from inflation, a weak dollar and swings in the stock market. Over the last few years, there has been a large increase of investing in commodity mutual funds do to the bad performance of the stock market.

With the large amount of choices in the stock and mutual fund market, stock brokers usually do not research or recommend commodity mutual funds. They probably have hard enough time pushing their stock pick of the day, let alone trying to sell commodity products. For that reason, you need to do your own research into commodities and commodity mutual funds.  They can add value to your retirement fund.

Why Traditional Diversification is not Diversified

Diversification has taken on many meanings within the past few decades depending on who you talk to, and in my opinion, I think on the way we lost its true meaning. I believe the reason for losing the real meaning of the word is due to the financial services industry bending and flexing it to their benefit. Putting the question of diversification to someone within the traditional financial services sector, is like asking someone in the oil business what is the best source of energy? It would be a safe bet that both answers would be skewed in favor of what they could sell you. So, what really is diversification? The definition, according to Webster’s dictionary is, “To make diverse: give variety to.”

So, to translate Webster’s definition to real world purposes, let’s explore some opinions on what supposedly qualifies as diversification? The large brokerage houses like Fidelity, Schwab, J.P. Morgan, and most others all pretty much say the same thing, “A basket of stocks that cover many sectors in a weighted fashion.” Well, I think we have all heard that before and it sounds like good advice if stocks were the only thing we were able to invest in. Fidelity outlines this approach on their website by stating one of the simplest, most common philosophies used in the traditional investment world when speaking about diversification, “By spreading your money out over different kinds of investments – stocks, bonds, mutual funds, and cash – you generally reduce risk without sacrificing potential returns.” Though I think we can all agree that the aforementioned is true, I think we can also agree that the stock market and bond market tend to counter move each other thus affecting each other. Also, consider that Fidelity only talks about what they can sell you, i.e. stocks, bonds, mutual funds, and money market cash accounts(what I like to call “The Traditional Four”). Merrill Lynch’s website states a similar philosophy and their version of diversification is either small cap or large cap, value or growth, and domestic or international. That still refers to publically traded financial markets, and again only offers products that they can sell you.

Most of the people reading this know that the stock market or the financial markets as a whole are basically a place where companies in the world can present and solicit themselves publicly. But one must consider that, due to globalization and advanced communication, all the exchanges in the world seem to operate as a single market place that have access to the same media and have the ability to influence each other. If you had a basket of stocks that you thought was diversified because it was covering many industries, and because it traded on one or more of these global stock markets operating as part of the larger single market, isn’t there a fundamental diversification problem with this? What I see is only one marketplace; hence, it is not diversified and a glaring example of this is the current credit and subprime crisis. Ask yourself if you would invest all of your money in say, only the NASDAQ? If you answered no, then your common sense is telling you that a single market is not diversified enough, and not safe enough. Through reaction and counter reaction, all of these global markets are moving and functioning like a single global market and your own common sense will tell you whether or not it is safe enough for all your investment dollars.
 
At this point I have every broker, advisor, and trader up in arms and ready to call in the firing squad, but before we do that, let’s dig a little deeper. Ask yourself how many times the “basket of stocks” made it through a correction untouched? Ask yourself how your portfolio fared during the dot.com bust in the early part of this century? Ask yourself how it performed during the little correction back in July of 2007 or the first few months of 2008?
 
Now that I have used up all my shock value, let’s get practical. Stocks, bonds, and mutual funds are all very important investment vehicles, but they are only three that are represented by the “single market.” Now here is something that most financial advisors probably won’t ever talk to you about. THERE ARE OTHER WAYS TO INVEST YOUR MONEY. There are people out there that are making great returns in ways that are not directly related to the single “financial” market. So let’s take a look at a few alternative investments that are not represented by the “single market” by using some examples below:

Raw Land – Medium Return-High Risk-Not Passive

Income Property -Medium Return-Medium Risk-Not Passive

Lending-Medium Return-Medium Risk-Not Passive

Rare Coins-Low Return-Low Risk-Not Passive

Antiques-Low Return-Low Risk-Somewhat Passive

Car Washes-Medium Return-Medium Risk-Not Passive

Coin Laundry-Medium Return-Medium Risk-Not Passive

Art – High Risk-High Return-Somewhat Passive

 
As we can see, there are definitely some alternative investments available that are not offered by your typical financial advisor, but there is a reason most people would not invest in these alternative investments; they are not for the inexperienced nor are they passive investments like stocks, bonds, or mutual funds. I am not using the IRS definition of passive, because in their eyes passive means you buy a rental property and you get to go to the bank and cash checks every month without any work, though this is rarely the reality. I am however using passive in the sense that after an individual purchases the investment, there isn’t additional work or time that goes into it except for collecting a return. This is sometimes called an “armchair investment.” With this in mind, all of the above investments really don’t qualify. Let’s face facts, it would be great to diversify into these alternative investments, but who has time to do the years of research it takes to be a numismatics expert and successfully trade rare coins at a profit, or manage and staff a car wash every day. One could argue that if you hired a property manger for your rental property, it would make it passive; however I can tell you from my own experience that you still have to manage your manager.

So, what if the aforementioned alternative investments were offered as a private fund with the expertise needed to return double digit returns while the investor did nothing but collect a check every quarter? Would that be a diversification from stocks, bonds and mutual funds? My unsolicited answer to that is yes, and in the effort to offer up an alternative, it is what helped give birth to hedge funds and private equity funds with the former’s strategy mostly using the financial markets and the latter offering more private alternative investments.

Most of us know about REIT’s that allow us to have the benefit of property ownership without being involved in the management aspect. However, I can almost guarantee that 95% of the investors out there didn’t know that there are managed funds for alternatives like rare coins, art, lending, medical technology, etc that was packaged into an armchair investment. The best part is that these private funds can often be a true diversification for an investor’s portfolio and also be an armchair investment. Remember, investing in a private alternative investment not only gives diversification from traditional investment vehicles but it also gives another important diversification factor; many of these funds are not traded on a public exchange.

This is crucial as it helps shelter the investment from the day to day fluctuations of the financial markets. Another important characteristic found in many of these investments is that they are backed by real tangible assets. This goes back to an age old argument of what the real value of paper is in comparison to something tangible like real property. There may also be internal diversification within many of these alternative investment funds, which adds another possible layer of security (As a managing partner of Regent Global Funds, we have always believed that diversification within the fund itself to be paramount to our strategy). All together, this gives the investor diversification from traditional investments, traditional markets, and from the investments themselves in the portfolio. They are basically structured as a private mutual fund based on an alternative investment strategy.

The next time you hear someone advising or talking about diversification, ask them, ” What is your definition of diversification?” If they hit you with the “Traditional Four”, make sure you tell them about the single market. You may find yourself on a soap box lecturing to traditional people about alternative ideas.

Are American Depository Receipts or Mutual Funds Better for Global Diversification?

The benefits of international investing cannot be denied. There have been countless articles

and papers written on the subject already that are beyond the scope of this article. But what

exactly is the best method of gaining international exposure in your portfolio? Should you consider exposure to foreign companies via American Depository Receipts or are mutual funds

a more optimal solution?

American depository receipts (or ADR’s) are securities created by a U.S. bank that represent

shares in foreign companies that are held at the bank. An ADR may represent a portion of a

foreign share, one share or a bundle of shares. ADR’s themselves are not stocks, but certificates held by U.S. banks. Like U.S. common stock, ADR’s trade on U.S. stock exchanges and pay dividends (subject to U.S. taxation).

ADR’s, like most foreign mutual funds, are denominated in dollars, but they do not eliminate the potential currency risk associated with investing in foreign markets. So, when the dollar is weak, investment returns in foreign positions are usually more robust. Inversely, when the dollar rallies against foreign currencies, ADR’s from those countries will fall more than if shares were held by direct investors in the company.

Unfortunately, if your objective is to achieve global diversification in your portfolio, ADR’s are quite limiting. When you buy an ADR, you are gaining representation in one foreign company,

a concentrated risk by most prudent standards. Furthermore, most ADR’s are limited to mid to

large capitalization companies. So, even if an investor owned every traded ADR on the

exchange, he/she would end up owning something similar to an EAFE index, but at a much

higher acquisition cost.

We can all agree that the purpose of including foreign stocks in a portfolio is to control risk and maximize return. However, these dual objectives cannot be obtained solely with international large cap exposure (which is all that the ADR would provide). In order to accomplish your goal you should also include foreign value, foreign small, foreign small value and emerging markets. These simply cannot be attained with ADR’s.

So, for access to foreign markets, international mutual funds are a better alternative. They

have the ability to provide broad global representation while spreading risk across hundreds of companies, sectors, and countries around the world. The aforementioned asset classes like foreign small, foreign small value et al are all available to investors.

It should be noted that because international stocks are more costly to trade, foreign funds

typically carry higher expense ratios than their domestic counterparts. Furthermore, the

dividends of international stocks are subject to foreign taxation—even when the recipients are

tax-exempt in the US (like a pension plan). Taxable investors, however, can receive credits for foreign taxes paid. Of course, cost conscious investors should consider global index funds or exchange traded funds to keep costs to a minimum.

Yet despite the potential cost and foreign tax implications, international mutual funds (unlike

ADR’s) allow investors to capture a broad array foreign exposure. When soundly combined with

other domestic asset classes, international exposure is an essential building block in any

optimal portfolio, and mutual funds (not ADR’s) provide you with the best tools to achieve that

goal.

The Idea Behind Diversification Of Mutual Funds

A mutual fund investment involves buying into a wide variety of options that range from individual bonds, stocks and other money market securities. Buy owning shares in a mutual fund investment, rather than individual stocks and bonds, your risk is widely spread out among the portfolios that the investment managers decide to invest in, making your investment even more secure.

This kind of risk spreading is referred to as diversification. Since each option class behaves in a different way, depending on the prevailing market conditions, when one of the securities decline, the losses incurred are balanced by the gains of the other. One arrangement that has always worked for me has been, buying stocks and bonds from the retail sector and offsetting any gains or losses with options in the industrial sector. I make sure i balance the different capitalizations available from the different sectors with the time the bonds will take to mature and vice versa.

Since diversification of mutual funds entails mixing of both retail and industrial sector options, you will  reduce the impact in terms of performance of any one portfolio. You will not notice sharp hikes and big falls, what you get will be evenly spread out. Both large and small time investors should always strife to achieve this kind of asset diversification and allocation in order to minimize losses.

It would be important to note that, by itself, a mutual fund investment gives you immediate diversification by the virtue of the fact that many investors have pooled resources together in order to invest in a variety of options, but in itself, it is not enough. You need to invest both in sector and industry based options since, when the industrial segment is doing badly, other sectors of the economy, like insurance and health care would be doing very well. This will cushion you, as an investor, from any hard economic scenario that will definitely be felt when you decide to invest in one security.

Mutual Funds Diversification

Mutual funds are one category of investment securities that offer a very wide range of options from which an investor can choose from. This means that, one will be able to spread risk and also increase chances of making more money from the various investment options. The securities that one can buy under the mutual funds investment category include stocks and bonds. This is what is known as mutual funds diversification.

This means that, with the diversification, there is a great chance for growth and as such, mutual funds are able to balance themselves out, even when the economic times are hard or when the stock market is not doing so well. However, they have their disadvantages as well. Depending on where you invest your money, there is usually no guarantee that you will fetch a good return on your investment.

The reason for this is because, the mutual fund managers are not the same, charges on commissions and other fees differ widely also. The other criteria for mutual funds diversification is the categorization into income and equity funds. Income funds are those that one invests in, purposely for the sake of earning an income. They are more reliable because they are offered by the government and they have a steady dividend return.

Equity funds on the other hand are more growth oriented and they guarantee no return on the investment. However, the more they grow, the more they are likely to fetch, once dividends are declared. Other mutual funds diversification strategies are to be found in other categories like the index funds, the international funds and the sector funds, they all have their specific attributes that make them unique. To get the best out of these investments, keep looking out for any changes and keep your mind open. Also invest in as many categories as possible.

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A big believer in global diversification

A big believer in global diversification
Executive Kevin Press sticking with mutual funds: ‘In this environment, I’m happy to pay for professional active management’

Read more on The Globe and Mail

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Investment Diversification With Mutual Funds

One of the biggest benefits of mutual funds is that they provide the means for individual investors to achieve broad diversification in their investment portfolios. Although many wealthy individuals and institutions use mutual funds as at least the core of their portfolios, having considerable wealth is not necessary to construct a well-diversified portfolio with mutual funds. Indeed, it’s possible to assemble a well-diversified portfolio of mutual funds with as little as $100,000, a fairly well diversified portfolio with $50,000 and an adequately-diversified portfolio of index funds with much less.

Having a well-diversified portfolio is important for three reasons. First, diversification can best be describe as not putting all of your eggs in one basket. Mutual funds are large diversified portfolios and thus provide automatic diversification within their respective asset classes. Investing in a number of mutual funds to spread your investable funds across a variety of asset classes increases your level of diversification and decreases your aggregate exposure to risk. As investment risk is measured in terms of volatility, decreasing aggregate risk decreases the volatility of the value of your portfolio, thus sparing you the roller coaster ride that you would experience if you held only a single asset class in your portfolio.

Second, although expected return diminishes with risk, the relationship is disproportionate and favors return. Well-conceived diversification has the potential to considerably reduce the aggregate risk of your portfolio at the cost of a relatively small reduction in your expected return. So your get a much smoother ride for a minimal cost.

Third, over the past 25 years or so, there have been a number of studies conducted that have concluded that asset allocation accounts for between 90% and 96% of your success as an investor, where success is defined as maximizing return at a level of risk that is consistent with your level of risk tolerance. Individual security selection accounts for the rest of investors’ long-term success. Now, just being broadly diversified won’t get you into that 90% to 96% range, but it’s a big step in the right direction. A viable model that defines the composition of an efficient portfolio is required to allocate your capital across the various asset classes in a manner that will reap the full benefits of diversification.

Diversification and asset allocation are not synonyms, as diversification is just a part of asset allocation. Diversification is a matter of degree; it describes the degree to which you have diversified away company-specific risk. Full diversification within a market, in theory, eliminates all company-specific risk, leaving your portfolio exposed only to systematic risk, which is the risk inherent in the market as a whole. So, that brings up the obvious question of what “The Market” is.

The S&P 500, Russell 1000 and Wilshire 5000 are often used as proxies for “The Market.” But they’re only proxies for the U.S. stock market. To be fully diversified, you would have to be invested in all of the publicly traded securities (stocks, bonds, real estate and commodities) worldwide and your investments would have to be broadly diversified within all asset classes in that aggregation. This can actually be achieved by holding a collection of index funds.

Asset allocation describes how your capital is distributed to the diversity of asset classes you have chosen to hold in your portfolio, i.e., your investment universe. If you had chosen full worldwide diversification, your next step would be to determine how to allocate your capital across that aggregation of asset classes. One possibility would be to hold what’s known as the Market Portfolio. To do this you would have to invest in all those asset classes on a market capitalization-weighted basis. That would by definition be an efficient portfolio and constructing such a portfolio is possible with index funds. It’s also possible with regular mutual funds, but getting and maintaining the appropriate weightings would be pretty tricky and require a lot of time and effort.

Beyond the Market Portfolio, there are just about as many ways to select asset classes and allocate capital as there are portfolio managers, investment advisors and newsletter editors. Although they’re mostly based on the same financial theories, everyone has their own model and their own forecasts to fuel the models. But going any deeper into asset allocation would diverge too far from the topic of this article…diversification.

In real estate it’s location, location, location. In investing it’s diversification, diversification, diversification. You must be adequately diversified, otherwise you will be exposed to too much risk with respect to your expected return. And no asset allocation model can compensate for under-diversification, as your chosen degree of diversification defines the investment universe across which asset allocation must take place. With thousands of mutual funds to choose from, there’s no good reason for anyone to be under-diversified.

Diversification is just one of the many benefits that mutual funds provide to individual investors. You can learn much more about the benefits of investing in mutual funds at Your Complete Guide to Investing in Mutual Funds.