Diversification; Goal is to lower portfolio volatility without sacrificing overall returns

This strategy helps reduce the risk profile of an investment as it spreads out the portfolio over multiple asset classes or sectors.

The goal of diversification is to lower portfolio volatility without sacrificing overall returns. In this way, investors can benefit from holding a combination of stocks and bonds, as asset classes tend to perform differently in varying market conditions.

Here is a plan. Let us develop a strategy that helps keep us from making our mistakes.

What we must also have is a plan for HOW MUCH to invest n the stock market in the first place.

It makes sense for almost everyone to have a significant portion of their assets in stocks.  Just as important, few people should put all their money in stocks.  Whether you choose to invest 80% of your savings in stocks, or 40% in stocks depends in part on individual circumstances and in part on how human you really are.

An investment strategy where 100% of your assets are invested in the stock market can result in a drop of 30%, 40% or even more in your net worth in any given year (of course, many people learned this the hard way in recent years).   Since most of us are only human, we cannot take a drop of this size without opting for survival.  That means either panicking out or being forced to sell at just the wrong time

In fact, if we start with the premise that we cannot handle a 40% drop, then putting 100% of our money in the stock market is a strategy that is almost guaranteed to fail at some inopportune time down the road.

Obviously, if we invest only 50% of our assets in stocks, a market drop of 40% would result in losing "only" 20% of our net worth.  As painful as this still might be, if we maintain the proper long-term perspective, some of us might be better able to withstand a drop of this size without running for our lives.

Whether you choose to place 80% of your assets in stocks or 40%, that percentage should be based largely on how much pain you can take on the downside and still hang in there.

Pick a number. What percentage of your assets do you feel comfortable investing in stocks?

The important thing is to choose a portion of your assets to invest in the stock market—and stick with it!  For most people, this number could be between 40 percent and 80 percent of investable assets, but each case is too individual to give a range that works for everyone.

Whatever number you do choose, though, I can guarantee one thing: at some point you will regret your decision.  Being only human, when the market goes down you will regret putting so much into stocks. If the market goes up, the opposite will happen—you’ll wonder why you were such a chicken in the first place.  That’s just the way it is. (Actually, according to behavioral finance theory, that’s just the way you is!)

So here’s what we’re going to do. Against my better judgment, we’re going to give you some rope to play with. Once you pick your number, let’s say 60 percent in stocks, you can adjust your exposure up or down by 10 percent whenever you want. So you can go down to 50 percent invested in stocks and up to 70 percent, but that’s it.  You can’t sell everything when things go against you, and you can’t jump in with both feet and invest 100 percent when everything is rocking and rolling your way. It’s not allowed! (In any event, doing this would put you in serious violation of our plan!)

Small investors will have a huge advantage over professionals

And here’s the big secret: if you actually follow our plan, small investors will have a huge advantage over professionals—an advantage that has only been growing larger every year. Of course, you would think that with all the newly minted MBAs heading to Wall Street each year, the proliferation of giant hedge funds over the last few decades, the growth of professionally managed mutual funds and ETFs, the increasingly widespread availability of instant news and timely company information, and the mushrooming ability to crunch massive amounts of company and economic data at an affordable price, the competition to beat the market would actually be growing fiercer with each passing year.  And in some ways it is.  But in one important way, perhaps the most important, the competition is actually getting easier.

The truth is that it is really hard to be a professional stock market investor today.  

It’s just that it’s really hard to look at returns every day and every month, to receive analysis every month or every quarter, and still keep a long-term perspective.  Most individual and institutional investors can’t do it.  They can’t help analyzing the short-term information they do have, even if it’s relatively meaningless over the long term. On the bright side, as the market has become more institutionalized and performance information and statistics have become more ubiquitous, the advantages for those who can maintain a long-term perspective have only grown.

For those investing in individual stocks, the benefits to looking past the next quarter or the next year, to investing in companies that may take several years before they can show good results, to truly taking a long-term perspective when evaluating a stock investment remain as large, if not larger, than they have ever been.  

Remember from early in our journey, the value of a business comes from all the cash earnings we expect to collect from that business over its lifetime.  Earnings from the next few years are usually only a very small portion of this value. Yet most investment professionals, stuck in an environment where short-term performance is a real concern, often feel forced to focus on short-term business and economic issues rather than on long-term value. This is great news and a growing advantage for individual and professional investors who can truly maintain a long-term investment perspective.

This focus on the short term by professionals is also a huge advantage for individual investors 

Luckily, since it’s particularly hard for most nonprofessionals to calculate values for individual stocks, this focus on the short term by professionals is also a huge advantage for individual investors who follow an intelligently and logically designed strategy.  Because value strategies often don’t work over shorter time frames, institutional pressures and individual instincts will continue to make it difficult for most investors to stick with them over the long term. For these investors, several years is simply too long to wait.

Hanging in there will be tough for us, too. But as individual investors, we have some major advantages over the large institutions. We don’t have to answer to clients. We don’t have to provide daily or monthly returns. We don’t have to worry about staying in business. We just have to set up rules ahead of time that help us stay with our plan over the long term. We have to choose an allocation to stocks that is appropriate for our individual circumstances and then stick with it. When we feel like panicking after a large market drop or ditching our value strategy after a period of underperformance, we can—but only within our preset limits. When things are going great and we want to buy more, no problem, we can—we just can’t buy too much.

So there it is. We have a strategy that beats the market. We have a plan that will help us hang in there. 

And, as individual investors, we have some major advantages over the investment professionals. All we need now is a little more encouragement. Perhaps a final visit with Benjamin Graham will help push us on our way.

In an interview shortly before he passed away, Graham provided us with these words of wisdom:

The main point is to have the right general principles and the character to stick to them.… The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.… Imagine—there seems to be practically a foolproof way of getting good results out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the tests that I would make up.

After so many years, we still have an opportunity to benefit from Graham’s sage advice today.

We now have a great plan for how to invest in the stock market.

Finally, for the portion of our money that we choose to invest in the stock market, we should have a better idea 

1. of how company valuation is supposed to work, 
2. of how Wall Street professionals should work (but don't), and 
3. of how we can outperform the major market averages and most other investors.

Buy and Hold? Really? Depends on your AGE and NEEDS

How should you choose between stocks and bonds?

Financial advisors are risk averse.  Their risk aversion may have less to do with your financial situation than their reputations.  Conventional wisdom is that a portfolio that is invested one-third in bonds and two-thirds in stocks is the way to go irrespective of the level of your assets.  The one-third, two-thirds formula is the standard.  It is safe because that is what the herd recommends.

The conventional model of portfolio construction, the one-third bonds two-thirds stocks, requires that you periodically rebalance your holdings.  By this, they mean that if your stocks had a particularly great year and now are 75% or 80% of your portfolio, you should sell some stocks and invest the proceeds in more bonds.  That is like selling your winners and reinvesting in your losers. 

• How smart is that?  
• If you already have enough cash to ride out three down years, why do you need more?

The major brokerage houses issue "asset allocation" formulas depending on their view of the stock market in the near term.  This sounds like market timing.  
However, people are different.  Your financial assets and your needs vary tremendously.  

• What if you have a lot of dollars and need only a pittance to maintain your lifestyle?  
• Why would you invest one-third of your money in an under-performing asset?

The two most important considerations in formulating an asset allocation formula are:

• age.  and
• how much money you have to support your desired lifestyle.

Jeremy Siegel's book - Stocks for the Long Run

In every rolling 30-year period between 1871 and 1992, stocks as measured by an index, beat bonds or cash in every period.  

In rolling 10-year periods, stocks beat bonds or cash 80% of the time.  

Bonds and cash did not beat the rate of inflation over 50% of the time.  



So why would anyone own a bond?  The answer comes back to age and need.

If you are young (20 years to 35 years) and have a job that pays your bills, you can take a long view on investments.

A lot of what you do in investing is just simple common sense.  Many investors think they should be proactive and keep looking for ways to tweak their investment portfolio when just sitting tight, if they made the correct choices in the first place, often would be the better course.





Examples: 

Asset allocation is based on age and need.

1.  A friend liquidated an asset and wished to invest in the stock market.  However, he will need this money for a project he is working on at end of the year.   He should not invest this money in stock, as his need for the money did not anticipate any setback in the stock market.  If he could not be in for the long term, he should not be in.

2.  In early 1980s, a widow inherited a $4 million account with an investment firm and in addition $30 million of Berkshire Hathaway stock.  She anticipated retiring and needed some income going forward.  She had lived comfortably but modestly, given her wealth.   The reason she was so rich was because all her assets had been well invested in stocks.  Her accountant replied that she had all her assets in the stock market which was, by definition, risky. He suggested a charitable remainder trust into which she could put the Berkshire stock, sell it without paying any capital gains taxes, and reinvest the proceeds in bonds for current income.   On the other hand, her investment advisor replied even if the stock market dropped 50%, she had enough money to live comfortably until her very old age and asked why she would want to stop enjoying the benefits of future appreciation. She decided to leave everything as it was and received her income needs out of the money she had invested with the investment firm.   A number of years later, she reviewed her plan.  She had $180 million.  Today, she has upward of $300 million.  

When to sell? Sell when there is something else better to buy.

When should you sell?

Answer: Sell when there is something else better to buy.

Something else better for future returns.

Something else better for safety.

Something else better for timeliness or fit with today's go-forward worldview; a megatrend.



What is that something else? 

It can be:

- another stock
- an index fund
- a house
- or any kind of investment

It can also be cash. 

Sell that stock when .... when what? When cash is a better investment. Or when you need the money, which is another way of saying that cash is a better investment - at least it is safer for the time being.



Best possible deployment of your capital

If you think of a buy decision as a best possible deployment of capital because there is no better way to invest your money, you will also come out ahead.

It really is not hard, especially if you have done your homework.

And it is also made easier if you avoid rash overcommitments; that is, you avoid buying all at once in case you have made a mistake or in case better prices come later down the road.



Buy and hold quality companies for the long haul, and you will likely be handsomely rewarded for that patience.

Invest regularly.

Ray Dalio - Asset Allocation, Risk Parity, Diversification (CNBC)

Published on 29 May 2013

Full video here 
http://video.cnbc.com/gallery/?video=3000142389

In this shorter segment of the full CNBC video Bridgewater's CEO Ray Dalio discusses his investment philosophy for achieving a balanced structured portfolio and thereby superior asset allocation. He explains how the macro environment of growth and inflation needs to be carefully matched against the portfolio's volatility of bonds, equities and other assets. 


[Achieving Strategic Asset Allocation with Risk Parity]

"There is the strategic allocation mix which we call 'All Weather'. It has to do with making all the assets the same risk parity. The problem is when people try to diversify and they own equities, and equities have volatility that's large, or they own assets that do well when the economy does well and do badly when the economy does badly, they have a concentration of risks in some assets. They need to do .... so that bonds and equities and pieces have comparable impacts. So that whatever happens in the economy has a balancing effect. That's the All weather piece. 

We have a lot of diversified bets. It's very important for most people to know when not to make a bet! If you come to the poker table you're going to have to beat me. The nature is a very small percentage of people take money in the poker game. They don't know if it's a good investment or a more expensive investment."



[On Bonds vs. Stocks and Diversification of Risk in all periods]

"The problem of a stock and a bond portfolio, if you put 50 per cent of your money in stocks and 50 per cent of your money in bonds, the problem is you have about 80 per cent of your risk in stocks and about 20 per cent of your risk in bonds. So you don't have diversification. Imagine if you had a bond portfolio with the same volatility as stocks and you went through the financial crisis. Most of the decline in your portfolio would have been protected because the stocks would have gone up in value by an amount that would have offset the other. You have to have comparable amounts of risk in that."

Create a Portfolio You Don't Have to Babysit

Great Q&A starting @ 42 min. Very insightful

Published on 14 Jun 2012
In this special one-hour presentation, Morningstar director of personal finance Christine Benz and ETF expert Mike Rawson discuss how to build a low-maintenance, hands-free portfolio that will help you reach your financial goals.

Note to viewers: Filmed in late April 2012, this Morningstar presentation was part of Money Smart Week, a series of free classes and activities organized by the Federal Reserve Bank of Chicago and designed to help consumers better manage their personal finances. Morningstar is a Money Smart Week partner.

Download the presentation slides here:
http://im.mstar.com/im/moneysmartweek_presentation.pdf

A Guide to Investing by Age

Hesitation can cost you dearly. The average investor foregoes 4–5% in returns each year by leaving their wealth in cash.

Hesitation can cost you dearly

The average investor foregoes 4–5% in returns* each year by leaving their wealth in cash rather than investing in a diversified portfolio.

Failing to invest at all is the first way in which we exchange long-term performance for short-term emotional comfort. Here, the comfort factor is very simple – we cannot lose if we don’t get involved. But the potential cost – on average 4–5% in lost returns each year – is very high

Often those prone to reluctance only decide to invest when there is a sustained market boom. But by going in at the top of the market, they may experience the knock-on effects of buying high: a reduction in returns and an increase in anxiety and stress.

Take this Financial Personality Assessment™


*Source:  Barclays Wealth & Investment Management, White Paper - March 2013, "Overcoming the Cost of Being Human'.

http://www.investmentphilosophy.com/fpa/

Professor Swensen's Asset Allocation Strategy

@ 15 minutes

3 ways to make money:
Asset Allocation
Market Timing
Stock Selection




David Swensen is the chief investment officer of Yale University, where he has produced stunning results in managing portfolios over 25 years. In this lecture, he talks about managing a portfolio for individual investors and stresses on the importance of diversification and equity-orientation.

Special Lecture in Seoul April 2010

Yale's Financial Wizard, David Swensen.

Uploaded on 27 May 2009
Yale's Financial Wizard, David Swensen. The renowned Chief Investment Officer of Yale's $20 billion dollar endowment discusses the strategy behind the fund's extraordinary long term track record, recent criticisms of the "Yale model" and his investment recommendations for individual investors.

Open Yale Course：Financial Markets 09. Guest Lecture by David Swensen

Ideas for Investment Success

Uploaded on 24 Mar 2011
David Swensen is a so-called legendary institutional investor who has survived a harsh investment environment over several decades. In his interview, he suggests the elegantly simple advice for you to have to follow for your investment success.

Asset Allocation: Building a Better Balanced Portfolio

Portfolio Allocation for Peak Earners

Warren Buffett: Intrinsic Value and Capital Allocation

Intrinsic Value and Capital Allocation

     Understanding intrinsic value is as important for managers as it is for investors.  When managers are making capital allocation decisions - including decisions to repurchase shares - it's vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it.  This principle may seem obvious but we constantly see it violated.  And, when misallocations occur, shareholders are hurt.     

     For example, in contemplating business mergers and acquisitions, many managers tend to focus on whether the transaction is immediately dilutive or anti-dilutive to earnings per share (or, at financial institutions, to per-share book value).  An emphasis of this sort carries great dangers.  Going back to our college-education example, imagine that a 25-year-old first-year MBA student is considering merging his future economic interests with those of a 25-year-old day laborer.  The MBA student, a non-earner, would find that a "share-for-share" merger of his equity interest in himself with that of the day laborer would enhance his near-term earnings (in a big way!).  But what could be sillier for the student than a deal of this kind?

     In corporate transactions, it's equally silly for the would- be purchaser to focus on current earnings when the prospective acquiree has either different prospects, different amounts of non-operating assets, or a different capital structure.  At Berkshire, we have rejected many merger and purchase opportunities that would have boosted current and near-term earnings but that would have reduced per-share intrinsic value.  Our approach, rather, has been to follow Wayne Gretzky's advice:  "Go to where the puck is going to be, not to where it is."  As a result, our shareholders are now many billions of dollars richer than they would have been if we had used the standard catechism.

     The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer's management; and they are a honey pot for the investment bankers and other professionals on both sides.  They usually reduce the wealth of the acquirer's shareholders, often to a substantial extent.  That happens because the acquirer typically gives up more intrinsic value than it receives.  Do that enough, says John Medlin, the retired head of Wachovia Corp., and "you are running a chain letter in reverse."    Over time, the skill with which a company's managers allocate capital has an enormous impact on the enterprise's value.  Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally.  The company could distribute the money to shareholders by way of dividends or share repurchases.  Often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquisition or two might make sense.  That's like asking your interior decorator whether you need a $50,000 rug.

Types of investment

Before you decide how to invest, learn about the potential risks and rewards of the 4 main kinds of assets – shares, bonds, property and cash. There are several different classes of asset, each with its own strengths and risks. By spreading your money across a range of assets, you can create a portfolio that balances risk, growth and income according to your priorities. Spreading your money out across assets in this way is called diversification. It can help you lower overall risk, since different kinds of assets perform well at different times. The main types of asset To help you find your ideal allocation, you should familiarise yourself with the main asset classes: Shares are high-risk investments, but they offer the best long-term returns. Find out more about shares Bonds are investments that can provide a steady income. More about bond investing Property, particularly buy-to-let property, takes time to manage. But the potential rewards include income from rent and capital gains if housing prices rise.  Cash is a safe and familiar asset, but one with very low returns. More on cash. Diversification If you diversify your portfolio by holding a variety of investments, you can prepare yourself for the ups and downs of the market. Different shares and assets perform well at different times. If you diversify your portfolio – that is, buy a variety of investments – you can take advantage of these differences in performance and achieve a more balanced return. The advantages of diversification are easy to see when you consider what might happen to a non-diversified portfolio. If you hold the shares of just one company and it collapses, you could well lose your entire investment. If you were chasing returns in a particular sector that takes a hit – much like the banking sector in 2008 – you would again find yourself with heavy losses. With a diversified portfolio, only a small fraction of your money is tied up in any given area. So a single bankruptcy or industry slump cannot have too large an impact on your total return. Remember that the value of well diversified portfolio can fall as well as rise. How to diversify You can diversify your investments at a number of different levels: across companies across industries geographically across asset classes. If you want to diversify while still keeping your portfolio manageable, you should consider pooled investments. These can include ETFs, funds, or unit trusts/OEICs, all of which invest in a basket of shares, bonds or other assets.

How To Build Wealth Using Our Four Pillars of Wealth

How To Build Wealth

Achieve Your Financial Goals in the New Millennium Using Our Four Pillars of Wealth

An Investment U White Paper Report
By Alexander Green, Chief Investment Strategist, Investment U

Our philosophy of investing is this: You can’t go too far wrong if you get the big questions right.

The big questions are not “when will the economy recover?” or “where will the market go next?” True, these are the questions that most investors obsess over. But it’s a misallocation of your time.

The big question is how to build wealth with a game plan for the long haul and, more specifically, the following points that you can take action on:

• How can I secure the highest return with the least amount of risk?
• How can I protect both profits and principal?
• What can I do to build wealth and guarantee my investment portfolio will be worth more in the future?

Here’s how this philosophy can make this year – and your future ones – very prosperous.

How To Build Wealth Pillar 1: Stick to Our Asset Allocation Model

Successful investing begins by conceding that – to a degree – uncertainty will always be your companion.

You can guess what the market is going to do and be right or you can guess and be wrong. Or you can let some self-styled “expert” do the guessing for you. But no one guesses right consistently.

That’s why we follow a wealth-building investment formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990. His paper promising “portfolio optimization through means variance analysis” demonstrates how to maximize your profits and minimize your risk by properly asset allocating and rebalancing your portfolio.

Diversity Doesn’t Mean 3 Different Tech Stocks

Sometimes our readers tell us: “Oh, that means diversify. I already do that.” But that’s not what asset allocation is about. Right before the dot.com crash, you could have diversified into Microsoft, Intel, Yahoo and Amazon.com… and gone right off the cliff.

Asset allocation refers to spreading your investments among different asset classes, not just different securities or market sectors. Doing this has allowed us to survive, prosper and build our wealth, even during rough times.

High-grade bonds, real estate investment trusts (REITs), high-yield investments, inflation-adjusted treasuries, precious metals: It’s good to have at least a piece of each.

Because different asset classes are imperfectly correlated – some zig while others zag – our model allows you to boost returns while reducing your portfolio’s volatility.

In layman’s terms, proper asset allocation means you sleep better at night.

The Foundation of Our Philosophy

Asset allocation should be the foundation stone of your whole investment program. It’s critical to building your long-term financial health. To learn more about it, pick up a copy of William Bernstein’s excellent book, The Intelligent Asset Allocator.

How To Build Wealth Pillar 2: Adhere to the Oxford Safety Switch

Anyone can buy a stock or publicly traded fund. The real art of investing is knowing when to sell. Investment U does not rely on point-and-figure charts or tarot cards or Elliott Waves. Instead, we adhere to a time-tested trailing stop strategy. That means no member takes one of our stock recommendations without knowing in advance exactly where we’ll get out.

This takes the guesswork out of investing. And guarantees that both your profits and your principal are always protected. Here’s a quick review.

Let Your Winners Ride

We start all of our trading positions with a recommendation that you place a sell stop 25% below your execution price. As the stock rises, we raise the trailing stop. In other words, if you buy a stock at $20, your stop loss is at $15. When the stock hits $32, your stop loss (still trailing at 25%) will be at $24.

As long as the stock keeps trending up, we’re happy to hang on. If the stock pulls back 25% from it’s closing high, we sell. No questions asked.

And Cut Your Losses Early

You protect the profits you’ve earned on the way up and also protect your principal when things go awry. Everyone knows you should cut your losses early and let your profits run. But very few investors actually do it. The Oxford Safety Switch, championed by The Oxford Club, guarantees that you do.

During the bull market of the 1990s, many investors watched as their stock portfolios grew bigger and bigger. There was only one problem. They never took any profits. They had no sell discipline whatsoever. So when stocks started tanking, they watched many of those profits evaporate entirely. Some even turned into losses.

Other investors then bought stocks early in the ensuing bear market with high expectations. And they were crushed to see those shares drop to levels they never would have imagined.

In both cases, the fault was the same: They failed to have a sell discipline. Investors without one are flying by the seat of their pants. And that rarely ends in award-winning results. It’s simply not a practical means to build wealth.

Action to take: Use a trailing stop on all your individual stocks and have the gumption to stick with it.

How To Build Wealth Pillar 3: Size Does Matter Understand Position-Sizing

Often when the Oxford Club recommends a particular stock at a chapter meeting or seminar, someone in the audience will ask how much he or she should invest in it.

Of course, we know nothing about that individual’s net worth, investment experience, risk tolerance or time horizon. But we do have a position-sizing formula you can use to determine how much to invest in a particular stock: 3% of your equity portfolio. If you want to be conservative, invest less. If you want to be aggressive, invest more. But not too much more.

Don’t Fall in Love with an Investment

The saddest stories heard in the financial press are those of people who took a serious financial hit late in life because they were overconfident. In short, they liked an investment so much they plunked too much in it. Big mistake.

Yes, you could hit the jackpot that way and some people have. But that’s a roll of the dice and it’s not recommended.

Look at the thousands of people devastated during the recent bear market because their entire pension was tied up in their employer’s stock. More often than not, these folks had the option of putting the money into a diversified stock fund or safer alternatives.

Not spreading the risk might have felt like the right thing when the stock was rising, but it sure hurts on the way down.

You Can Afford the Hit

That’s why position sizing is important. It’s not just about the size of your initial position; it’s also about how much of your portfolio the position becomes. Many investors refuse to diversify even when a single stock becomes a substantial percentage of their entire portfolio. They always had the same excuse: “I just can’t afford the tax hit.”

But taxes should never be the first priority in running your investment portfolio. Former blue chips like WorldCom, Enron and United Airlines have taught us that – in hindsight – the federal tax bite can look like a kiss on the cheek.

How To Build Wealth Pillar 4: Cut Investment Expenses, and Leave the IRS in the Cold

Unless you run or sit on the board of the companies you invest in, there’s nothing you can do to affect your stocks’ performance once you own them. But there is a way to guarantee that your stock-portfolio value will be worth more five, 10 and 20 years from now.

Create wealth for the short- and long-term by cutting your expenses and stiff-arming the taxman.

Let’s start with expenses…

Just Say No To High Fees

Instead of buying the nation’s largest and best-performing bond fund, the Pimco Total Return Fund, we’re recommending the Manager’s Fremont Bond Fund (Nasdaq: MBDFX). You still get the nation’s top-performing bond fund manager, Bill Gross, but you forego the high fees and expenses associated with Pimco Total Return. Fremont is a no-load fund.

Likewise, we opted for the closed-end Templeton Emerging Markets Fund (NYSE: EMF) instead of the open-end Templeton Developing Markets Fund. Both funds invest exclusively in emerging markets. Both are run by Mark Mobius, the top manager in the sector.

But the Templeton Developing Markets Fund has a 5.75% front-end load. The Templeton Emerging Markets Fund – like all closed-end funds – has none. And it sells at an 11% discount to its net asset value (NAV). (You can never buy an open-end fund for less than NAV.)

In fact, there is nothing in our Oxford Portfolio that has a front-end load, back-end load, 12b-1 fees or surrender penalties. Furthermore, you can act on any of our recommendations through a no-load fund company or a deep discount broker that charges you no more than $8 a trade.

In short, a big part of our strategy in explaining how to build wealth is cutting portfolio expenses to the bone. Lower investment costs is the one, sure-fire way to increase your net returns.

5 Tax-Managing Tips (Reducing Expenses Helps To Build Wealth)

The second way is to tax-manage your investments. That means handling your portfolio in such a way that there is simply nothing there for the IRS to take.

Here’s how to do it:

1. Stick to quality. Higher quality investments mean less turnover. And less turnover means less capital gains taxes. The less you trade your core portfolio, the less tax liabilities you incur. As Warren Buffett warns, “the capital gains tax is not a tax on capital gains; it’s a tax on transactions.”
2. Try to hang on 12 months. Anything sold in less than 12 months is a short-term capital gain. And short-term gains are taxed at the same level as earned income, which can be as high as 38%. But long-term gains are taxed at a maximum rate of 20%. Even better, do your short-term trading in your IRA, where the gains are tax-exempt.
3. When you stop out in less than 12 months, offset your capital gains with capital losses. The IRS allows you to offset all of your realized capital gains by selling any stocks that have joined the kennel club. You can even take up to $3,000 in losses against earned income. Not selling your occasional losers is not only poor money management; it’s poor tax management.
4. Avoid actively-managed funds in your non-retirement accounts. Managed funds often have high turnover and Federal law requires them to distribute at least 98% of realized capital gains each year. You can get hit with a big capital gains distribution even in a year when the fund is down. In parts of Texas, this is known as “the double whammy.”
5. Own high-yield investments in your IRA, pension, 401K or other tax-deferred account. There’s no provision in the tax code to offset your dividends and interest. So do the smart thing. How to do this? Own big income-payers like bonds, utilities and real estate investment trusts (REITs) in your IRA.

	Average Portfolio	Oxford Portfolio
5 years	$140,255	$168,505
10 years	$196,715	$283,942
15 years	$275,903	$478,458
20 years	$386,000	$806,231

Your remaining choices are simple ones like owning tax-free rather than taxable bonds if you’re “fortunate enough” to reside in the upper tax brackets.

If you reduce your annual investment expenses and tax-manage your portfolio, the effect will be dramatic. For example:

The Vanguard Group of mutual funds recently conducted a study that indicates that the average investor gives up 2.4% of his annual returns to taxes. If you trade frequently, it’s likely much higher. We can also estimate that most investors give up at least 1.9% a year in commissions, management fees, 12b-1 expenses and other costs.

How to retain an additional 4% of your portfolio’s return each year: Reduce your expenses to .3% annually and tax-manage your portfolio.

Here are some important facts on how to build wealth and improve your portfolio over time using our strategy. The differences are not subtle.

The U.S. market has returned roughly 11% a year over the past 200 years. The previous chart reflects how a $100,000 stock portfolio grows at this rate – with the drag of taxes and high expenses, and without.

In other words, after 20 years, our cost-efficient, tax-managed portfolio is worth $419,000 more. (A million dollar stock portfolio, of course, would be worth almost $4.2 million more.) This is without factoring in any superior investment performance whatsoever! It’s simply the difference achieved when watching investment costs and taxes.

Armed with our Four Pillars of Wealth, a little diligence, and the discipline to stick with the program, we can all look forward to substantially higher real-world returns in our wealth-building pursuits.

The Four Pillars of Wealth, by the way, are fundamental to the success of Investment U‘s sister business, The Oxford Club, where Investment U’s profit strategies are put into action.

Good Investing,

Alexander Green

http://www.investmentu.com/research/buildwealth.html

Concept of Risk vs. Reward

Evaluation of Customers - Concept of Risk vs. Reward

Measuring Portfolio RisksOne of the concepts used in risk and return calculations is standard deviation which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number).

The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk.

Risk MeasuresThere are three other risk measures used to predict volatility and return:

• Alpha - this measures stock price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk.
  
• Sharpe ratio- this is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return. The formula is: Sharpe Ratio = (total return minus the risk-free rate of return) divided by the standard deviation of the portfolio.
  
• Beta - this measures stock price volatility based solely on general market movements. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.
  
• Learn how to properly use beta to help meet your portfolio's risk criteria in the article, Beta: Gauging Price Fluctuations.

Asset Allocation
In simple terms, asset allocation refers to the balance between growth-oriented and income-oriented investments in a portfolio. This allows the investor to take advantage of the risk/reward tradeoff and benefit from both growth and income. Here are the basic steps to asset allocation:

1. Choosing which asset classes to include (stocks, bonds, money market, real estate, precious metals, etc.)
2. Selecting the ideal percentage (the target) to allocate to each asset class
3. Identifying an acceptable range within that target
4. Diversifying within each asset class

If you are unfamiliar with asset allocation, refer to the tutorial: Asset Allocation.

Risk ToleranceThe client's risk tolerance is the single most important factor in choosing an asset allocation. At times, there may be a distinct difference between the risk tolerance of a client and his/her spouse, so care must be taken to get agreement on how to proceed. Also, risk tolerance may change over time, so it's important to revisit the topic periodically. 

Time HorizonClearly, the time horizon for each of the client's goals will affect the asset allocation mix. Take the example of a client with a very aggressive risk tolerance. The recommended allocation to stocks will be much higher for the client's retirement portfolio than for the money being set aside for the college fund of the client's 13-year-old child.

Read more: http://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/risk-reward.asp#ixzz1yhz7GZFU

Portfolio Management - Return Objectives and Investment Constraints

Return objectives can be divided into the following needs:

1. Capital Preservation - Capital preservation is the need to maintain capital. To accomplish this objective, the return objective should, at a minimum, be equal to the inflation rate. In other words, nominal rate of return would equal the inflation rate. With this objective, an investor simply wants to preserve his existing capital.

2. Capital Appreciation -Capital appreciation is the need to grow, rather than simply preserve, capital. To accomplish this objective, the return objective should be equal to a return that exceeds the expected inflation. With this objective, an investor's intention is to grow his existing capital base.
3. Current Income -Current income is the need to create income from the investor's capital base. With this objective, an investor needs to generate income from his investments. This is frequently seen with retired investors who no longer have income from work and need to generate income off of their investments to meet living expenses and other spending needs.

4. Total Return - Total return is the need to grow the capital base through both capital appreciation and reinvestment of that appreciation.

Investment ConstraintsWhen creating a policy statement, it is important to consider an investor's constraints. There are five types of constraints that need to be considered when creating a policy statement. They are as follows:

1. Liquidity Constraints - Liquidity constraints identify an investor's need for liquidity, or cash. For example, within the next year, an investor needs $50,000 for the purchase of a new home. The $50,000 would be considered a liquidity constraint because it needs to be set aside (be liquid) for the investor.
2. Time Horizon - A time horizon constraint develops a timeline of an investor's various financial needs. The time horizon also affects an investor's ability to accept risk. If an investor has a long time horizon, the investor may have a greater ability to accept risk because he would have a longer time period to recoup any losses. This is unlike an investor with a shorter time horizon whose ability to accept risk may be lower because he would not have the ability to recoup any losses.
3. Tax Concerns - After-tax returns are the returns investors are focused on when creating an investment portfolio. If an investor is currently in a high tax bracket as a result of his income, it may be important to focus on investments that would not make the investor's situation worse, like investing more heavily in tax-deferred investments.

4. Legal and Regulatory - Legal and regulatory factors can act as an investment constraint and must be considered. An example of this would occur in a trust. A trust could require that no more than 10% of the trust be distributed each year. Legal and regulatory constraints such as this one often can't be changed and must not be overlooked.

5. Unique Circumstances - Any special needs or constraints not recognized in any of the constraints listed above would fall in this category. An example of a unique circumstance would be the constraint an investor might place on investing in any company that is not socially responsible, such as a tobacco company.

The Importance of Asset AllocationAsset Allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. 

The ideal asset allocation differs based on the risk tolerance of the investor. For example, a young executive might have an asset allocation of 80% equity, 20% fixed income, while a retiree would be more likely to have 80% in fixed income and 20% equities.
Citizens in other countries around the world would have different asset allocation strategies depending on the types and risks of securities available for placement in their portfolio. For example, a retiree located in the United States would most likely have a large portion of his portfolio allocated to U.S. treasuries, since the U.S. Government is considered to have an extremely low risk of default. On the other hand, a retiree in a country with political unrest would most likely have a large portion of their portfolio allocated to foreign treasury securities, such as that of the U.S.

Read more: http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/return-objectives-investment-constraints.asp#ixzz1yfCssLbg

20 Investments

Most people will find that their investment objectives change throughout their lives. Capital appreciation may be more important for the young investor, but once she enters her golden years, that same investor may place a greater emphasis on gaining income. Whatever your objective, knowing what investment options are out there is key.

Table of Contents

1. 20 Investments: Introduction
2. 20 Investments: American Depository Receipt (ADR)
3. 20 Investments: Annuity
4. 20 Investments: Closed-End Investment Fund
5. 20 Investments: Collectibles
6. 20 Investments: Common Stock
7. 20 Investments: Convertible Security
8. 20 Investments: Corporate Bond
9. 20 Investments: Futures Contract
10. 20 Investments: Life Insurance
11. 20 Investments: The Money Market
12. 20 Investments: Mortgage-Backed Securities
13. 20 Investments: Municipal Bonds
14. 20 Investments: Mutual Funds
15. 20 Investments: Options (Stocks)
16. 20 Investments: Preferred Stock
17. 20 Investments: Real Estate & Property
18. 20 Investments: Real Estate Investment Trusts (REITs)
19. 20 Investments: Treasuries
20. 20 Investments: Unit Investment Trusts (UITs)
21. 20 Investments: Zero-Coupon Securities
22. 20 Investments: Conclusion

Read more: http://www.investopedia.com/university/20_investments#ixzz1xvXipPW4