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11 Ways to Diversify in 2011
Tweet Share on Facebook January 12, 2011 CommentInvestment critics have disparaged asset allocation and modern portfolio theory for several years, arguing that it simply does not work. However, the problem is not in asset allocation—it is in correlation, or the way two assets move in conjunction with one another.
Consider the S&P 500 index, the major domestic large-cap stock index in the United States, and the EAFE Index, the international large-cap stock index. Twenty years ago, their correlation was 0.4, which meant that the two indexes did not move together or apart from one another. (For reference, zero means very weak correlation, while 1 is highly correlated.) As a matter of fact, they really did not have any impact on each other's performance. Today, because of globalization and other factors, their correlation is 0.9, which means that these indexes virtually move in lockstep. This is an issue if you are trying to use investments in these indexes to offset each other's risk.
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Improve Your Understanding of Passive and Active Investing
Tweet Share on Facebook January 7, 2011 Comment (1)Lately I've been hearing a lot of consternation over passive versus active investing.
The recent financial crisis has caused a lot of advisors in the financial industry to trot out a lot of new ideas for their clients to "make sure that never happens again!" Thanks … really. But let's clarify what we really mean before anyone tries to answer the question, "Should I invest with a passive or active strategy?"
Passive investing—pros and cons. Passive investing is a strategy that attempts to reproduce or match the returns of an index. This strategy is not driven by a portfolio manager selecting individual securities, or by fundamental research. This provides a few benefits to the investor.
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ETF Basics: How to Own Rental Real Estate and Never Fix a Toilet
Tweet Share on Facebook January 6, 2011 CommentEvery retirement portfolio should contain real estate holdings. Sophisticated investors hold diversified real estate portfolios that can include portions of office buildings, apartments, industrial warehouses, retail centers, and shopping malls both in the United States and internationally.
Owning real estate has its own set of risks and benefits. A property that is well-located and leased gives you debt-like cash flow with the opportunity for appreciation like stocks. Leased buildings are valued based upon the stability of cash flow from rents and the cost to replace the building. Real estate also protects you against inflation, as its value tends to move closely with the costs required to replace it—think land, bricks, concrete, steel, labor, and fixtures. These costs rise with inflation, and landlords raise rents over time if inflation grows.
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The Best Financial New Year's Resolution
Tweet Share on Facebook January 5, 2011 CommentIt's that time again—time to set a few New Year's resolutions and work to make them come true. Twelve months from now, you'll likely run around frantically trying to find the list of your 2011 goals to see if you have completed any, only to find that you've not started one.
Let's make 2011 a completely different year. It's time to make history in your own life. And here's how to do it.
Everyone has financial goals, like to retire in five or 10 years. Some just want to open a mutual fund or a Roth IRA. Further still, some want to start a college fund for their kids. But each of these are only tactics. Going into the new year, we don't need more tactics or "to do's," we need a strategy.
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5 Things You Should Do for Your Investments Now
Tweet Share on Facebook January 4, 2011 CommentIt's a new year and time to treat yourself to the greatest gift of all—better investments. Making improvements to your investment accounts at least once a year can help you accumulate more money and reach your financial goals faster. So if you haven't sat down to review your portfolios, now's the time to get it done. Here are a handful of steps:
1. Rebalance your 401(k). Only one in six people who have 401(k)s ever change their investment mix. After you set up your 401(k), don't ignore your retirement account, which is the most important one you've got. If you have the right mix of stocks, bonds and cash, you'll do well now and have more money for retirement later. Make sure your asset allocation still matches your tolerance for risk, and make changes where needed.
