Is Your Portfolio Good Enough?
The Dynamic Wealth Report
July 30, 2010
by Jay Chernoff, Editor
I’d be willing to bet your portfolio isn’t performing like you
hoped. I’m saying this with confidence even though I’ve never seen any
of your investments first hand.
Why am I so sure?
It’s your financial advisors… They aren’t passing around the best
advice. In fact, they’re probably giving you the same worn out advice
they gave clients 50 years ago.
Think about how much has changed in the world over the last half
century.
Guess what… investment theory has also changed. But for some reason,
financial advisors haven’t adapted. They haven’t kept up with the times.
They’re still telling you to ‘buy and hold’.
It’s amazing really. Investments are so important to so many people. Just imagine if medicine or computers hadn’t progressed in 50 years…
But… I’m pretty sure I know why investment advice has stagnated for so
long. Because it didn’t really matter from 1940 to 2001. That’s right.
You’d buy your stocks and bonds and forget about them.
Everyone was making money. There wasn’t a whole lot of incentive to
modernize portfolio theory. Hey, no one ever lost money from taking
a
profit, right?
But times have changed. And in a big way…
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Clearly buy and hold isn’t working out in this bear market (though it
hasn’t stopped your advisor from recommending it as a strategy). Even
during previous bull markets, buy and hold may have meant you were
leaving money on the table.
Plain and simple, you aren’t optimizing your portfolio with a buy and
hold strategy.
Astonishing, isn’t it?
Fortunately, there are easy ways to improve your portfolio’s
performance. And you can do it without ever having to speak to an
advisor.
One investment strategy I like is called dynamic asset allocation. And,
it’s rapidly growing in popularity.
In a nutshell, dynamic asset allocation involves regularly rebalancing
your investments. The goal is to invest capital into different asset
classes based on expected performance using ETFs (or index funds).
For example, let’s say you have a portfolio consisting of large cap
stocks, treasuries, foreign government bonds, commodities, and emerging
market stocks. You decide commodities are about to take off and large
cap stocks are about to decline. So, you sell a portion of your large
cap stock investments and use the proceeds to buy more of your commodity
ETF.
Now of course, you need to do some research. You need to have an idea
about what areas are growing and which are declining. This strategy
won’t work just picking investments out of a hat.
But keep in mind, with dynamic asset allocation you’re looking at the
big picture. You don’t have to dig through some company’s annual report
to figure out a business model. Fraud is not something you’ll have to
worry about. There’s no risk of putting all your money into the next
Enron.
But that’s not all…
Using dynamic asset allocation, you’re in full control of your
investments. Adjust your positions whenever you want. You can rebalance
your portfolio quarterly if you prefer minimal maintenance. Or, if
you’re the active management type, you could rebalance monthly… even
weekly (but I don’t recommend it).
Using ETFs make rebalancing your portfolio quick and easy. ETFs trade
just like stocks. So trading them is as simple as trading shares of
Apple (AAPL) or Walmart (WMT). Plus, there’s a ton of choices for almost
every conceivable asset class.
Finally, this strategy let’s you take advantage of trends in the
financial markets. It’s a breeze to capitalize on the hottest sectors. And when the high flyers start to cool off, it’s easy to shift your
money to a different asset class.
Needless to say, I’m a big fan of dynamic asset allocation. It’s a
straightforward way to earn positive returns year after year.
But here’s the bottom line…
You can do much better than buy and hold.
Just don’t ask your advisor about dynamic asset allocation. They won’t
have a clue what you’re talking about.
•
Citrix Systems (CTXS) was
upgraded by Robert W. Baird this week. They now have an outperform
rating on the stock. The GoToMyPC provider hit a ten-year high following
better than expected revenue and an upbeat forecast.
• Advanced Micro Devices (AMD) was downgraded to
market perform by FBR Capital this week. The semiconductor maker has
delayed introducing new technology.
• Kaufman Bros. started coverage on AsiaInfo-Linkage
(ASIA) this week with a buy rating. The Chinese telecom software
provider disappointed investors with their earnings but they remain
optimistic about the future.
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