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How To Build Your Own Energy Portfolio
Tweet Share on Facebook March 3, 2011 CommentOil prices recently broke $100 a barrel and the stock market tanked. This week, Federal Reserve Chair Ben Bernanke proclaimed that increasing commodity prices could negatively impact the U.S. recovery. Moments like this are instructive for observing our own emotional schizophrenia. On one hand, our greed glands are pumping, and we want to get in on the action. We don't want to feel stupid by missing a further run up in oil prices. On the other, we still have memories of 2008 and recall the panic of a falling market, which keeps us fearful of buying at the top. And let's throw in the envy factor: Most of us have a friend that will inevitably disclose how he or she predicted this and bought oil stocks a year ago.
What's an investor to do? Bulls say that the world needs more oil than producers can pump, refine, and distribute, and this is getting worse as the Chinese start owning and driving cars. What about alternative energy? They claim that these sources won't make a meaningful impact for years. Bears say that OPEC will just turn on more oil because if they let prices get too high, their customers will have more incentive to find alternatives.
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3 Reasons Traditional Asset Allocation Doesn't Work
Tweet Share on Facebook March 2, 2011 Comment (2)We've been taught not to put all our eggs in one basket or in financial terms, not to have too much invested in one stock or one fund. These old adages tell you what not to do, but they don't tell what to do. Let's look at diversification and asset allocation with some ideas on how to make it work in your favor.
Many people think that if they hold several stocks or mutual funds they have solid asset allocation. That simply is not the case. Diversification is about having different assets in a portfolio. It's important to the note that while a portfolio may have many different assets, they may all have the same asset classification. For example, if an investor holds ExxonMobil, BP, and Gulf in a portfolio, that person is diversified, but all of those stocks are of the same asset class. If the market for oil stocks is crashing, then all of those oil stocks are plummeting as well. True asset allocation is not about having different assets. It's about having different asset classes. Oftentimes different asset classes react differently in the various market cycles, which is positive. This differing reaction to the various market cycles is called correlation, and it's much more important to hold assets that are not correlated rather than having stocks that are simply diversified.
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Why Investors Should Avoid Load Funds
Tweet Share on Facebook March 1, 2011 Comment (2)If there were two gasoline stations across the street from each other that both charged the same price per gallon, but one charged an extra 10 cents per gallon for paying with a credit card, would you go to that station? No. The same is true for mutual funds. That's why investors have to watch out for mutual funds that carry a load, which is a type of commission. Some people believe that load funds must be worth more because investors pay more to own them, but that's not true. Actually, the load doesn't go to the fund manager or management company that runs the fund. Instead, the load goes directly to the broker that sold the fund, as his or her incentive for selling you that fund.
Loads are bad for investors mainly because it hurts their ability to earn more money from mutual funds. If a fund carries a 5.75 percent front load, the broker will get $575 for every $10,000 you invest in the fund. That leaves you with just $9,425 to start with. This means you have to earn back the $575 that was paid to the broker just to break even. You also lose the compounding of the load amount as the market rises. That can grow to be a big number over many years, and ultimately cut into your investment returns.
