Remember Your Investment Horizon

Investment HorizonWhen the markets start acting crazy, remembering your investment horizon puts everything back into perspective. Fears in Europe, the economy, unemployment, and a few hundred other data sets all add to the daily swings of the market. But you can lower your risk to these issues by building your portfolio around a strict investment time horizon.

So are we heading for a repeat of last year? Or are the recent headlines another gut check for every investor out there? More importantly, should it really matter?

All that noise breeds a shortsighted view of your money. What is different today that affects your investment risk? The answer should be “Nothing” if your portfolio is built around your investment horizon. Continue Reading…

15 Year Look At Asset Class, Sector, And Country Returns

Tables comparing investment returns are nothing new. Fund companies and other financial institutions have used them for years to argue for or against different investing ideas. Though, the problem is most tables are either stuck inside a PDF file or quickly become a giant mess of colored tiles that make it hard to read. I thought I’d take the concept, clean it up, and take it a step further.

The idea started about a month ago with an article about contrarian investing. The article took a contrarian look at past performance across three areas – asset class, sectors, and countries. Continue Reading…

Expected Return: Avoid The Seduction of Big Numbers

When it comes to expected return, we love big numbers. We gravitate to it like paparazzi to a celebrity. We do it with performance and projections because it sells.

But there’s one tiny problem. Our expectations change with the market.

A while back I covered how asset allocation lowers volatility. In it, I showed how four different asset mixes performed against an all stock and an all bond portfolio. It looked like the graph below. It showed how volatility lowers as you decrease the amount of stocks in your portfolio. But did it?

Of course it did. It was a simple exercise to prove a point. But it also showed how much better an all stock portfolio performed over the same period. Continue Reading…

How A Simple Allocation Reduces Portfolio Volatility

Simple Portfolio AllocationLast week I dug into alternatives to low volatility ETFs. In it, I hinted at a another, simpler way to reduce portfolio volatility. It starts with diversification. But it ends with the asset allocation you choose. In other words, you can build a simple portfolio of stock and bond funds that limit the impact of market volatility. In most cases simpler is better. That is the goal here, to show how the simplest allocation strategy can reduce volatility in your portfolio.

Market Volatility

To understand market volatility we need to understand what moves the markets: why stock prices move and the same for bond prices. Most of the causes can be reduced to rumors, news, political, economic, and disasters. Let’s not forget our own behavior plays a role too. Continue Reading…

The Importance of Diversification

DiversificationIf you’ve ever heard “don’t put all your eggs in one basket”, it’s used to describe a simple investing principle known as diversification.

What Is Diversification?

Diversification is a way to lower risk by allocating your portfolio across various investments and asset classes. In doing so, it should limit your losses and lower volatility while still providing the best possible return for your money.

Diversification is the heart of many asset allocation models. When used correctly, it will help you reach your financial goals without taking on undo risk.

Why You Diversify

The purpose of all this is to reduce investment risk and prevent losses. You do this by dividing your portfolio among different assets classes – stocks, bonds, real estate, cash, and other investments. Continue Reading…