Posts Tagged ‘portfolio’
Should You Have Alternative Investments In Your Portfolio?
So you have discovered the merits of dumping your high-priced money manger and his ineffective mutual funds in favor of low-cost index funds allocated across stocks, bonds, and cash. [See top-ranked ETFs …
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TD Asset Management Inc. Announces Portfolio Adviser Changes
TD Asset Management Inc. Announces Portfolio Adviser Changes
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How To Pump Up Your Portfolio With ETFs
Similar to mutual funds, exchange-traded funds (ETFs) allow access to a number of types of stocks and bonds (or asset classes), provide an efficient means to construct a fully diversified portfolio, include index- and more active-management strategies and are comprised of individual stocks or bonds. But ETFs also differ from mutual funds, and in ways that are advantageous to investors.
Unlike mutual funds, ETFs are traded like any stock or bond and offer liquidity throughout the day. Moreover, ETFs generally do not pay out dividends and capital gains – instead, distributions are rolled into the trading price, allowing investors to avoid a taxable event.
In this article, we’ll show you how to add these funds to your portfolio to make it more liquid, user-friendly and profitable.
Modern portfolio construction theory (MPT) is centered on the concept that asset classes behave differently from one another. This means each asset class has its own unique risk and return profile, and reacts differently during various economic events and cycles. The idea of combining various asset classes, each with unique attributes, is the basis for building a diversified portfolio. ETFs provide small investors with a vehicle to achieve asset class diversification, substantially reducing overall portfolio risk.
Risk reduction is a concept that means many things to many people; therefore, a brief discussion of its use, in this context, is warranted.
Reducing Risk
Many investors believe that by holding a portfolio of 30 or more U.S. large-cap stocks, they are achieving sufficient diversification. This is true in that they are diversifying against company-specific risk, but such a portfolio is not diversified against the systematic behavior of U.S. large-cap stocks.
For example, U.S. large-cap stocks’ monthly returns, as a whole, averaged in the high teens, as seen in the S&P 500′s 15% average return between 1997 to 썗. So, this means that if you held just U.S. large-cap stocks, you should reasonably expect to see volatility in your portfolio of plus or minus 15% on any given month. Such a high degree of volatility could be unsettling and drive irrational behavior, such as selling out of fear or buying and leveraging out of greed. As such, risk reduction, in this context, would involve the minimization of monthly fluctuations in portfolio value.
Many ETF Asset Classes
There are many equity asset class exposures available through ETFs. These include international large-cap stocks, U.S. mid- and small-cap stocks, emerging market stocks and sector ETFs. Although some of these asset classes are more volatile than U.S. large caps, traditionally, they can be combined to minimize portfolio volatility with a high degree of certainty. Simply put, this is because they generally “zig” and “zag” in different directions at different times. However, in times of extreme market stress, all equity markets tend to behave poorly over the short term. Because of this, investors should consider adding fixed-income exposure to their portfolios.
ETFs also offer exposure to U.S. nominal and inflation-protected fixed income. Unlike equities, fixed-income asset classes generally offer mid-single-digit levels of volatility, making them ideal tools to reduce total portfolio risk. However, investors must be careful to neither use too little or too much fixed income given their investment horizons. You can even purchase ETFs that track commodities such as gold or silver or funds that gain when the overall market falls.
Investment Horizon
An individual’s investment horizon generally depends on the number of years until that person’s retirement. So, recent college graduates have about a 40-year time horizon (long-term), middle-aged people about a 20-year time horizon (mid-term) and those nearing or at retirement have a time horizon of zero-10 years (short-term). Considering that equity investments can easily underperform bonds over periods as long as 10 years and that bear markets can last many years, investors must have a healthy fear of market volatility and budget their risk appropriately.
Let’s look at an example:
| Example – Investment Horizon and Risk |
ETF Advantages in Portfolio Construction
In the context of portfolio construction, ETFs (especially index ETFs) offer many advantages over mutual funds. First and foremost, index ETFs are very cheap relative to any actively managed retail mutual fund. Such funds will typically charge about 1 to 1.5%, whereas index ETFs charge fees around 0.25 to 0.50%. Consider the benefits of saving 1% in fees on a $1-million portfolio – $10,000 per annum. Fee savings add up over time, and should not be discounted during your portfolio design process.
Additionally, index ETFs sidestep another potential pitfall for individual investors: the risk that actively managed retail funds will fail to succeed. Generally speaking, individual investors are often ill-equipped to evaluate the prospective success of an actively managed fund. This is due to a lack of analytical tools, access to portfolio managers and an overall lack of a sophisticated understanding of investments. Studies have shown that active managers generally fail to beat relevant market indexes over time. As such, picking a successful manager is difficult for even trained investment professionals.
Individual investors should therefore avoid active managers and the need to continuously watch, analyze and evaluate success or failure. Moreover, because the majority of your portfolio’s return will be determined by asset class exposures, there are little benefit to this pursuit. Avoiding active managers through index ETFs is yet another way to diversify and reduce portfolio risk.
Conclusion
Index ETFs can be a valuable tool to individual investors in constructing a fully diversified portfolio. They offer cheap access to systematic risk exposures, such as the various U.S. and international equity asset classes as well fixed-income investments. They are traded daily like stocks, and can be purchased cheaply through your favorite discount brokerage firm. Index ETFs also avoid the risks of active management and the headaches of monitoring and evaluating those types of products. All in all, index ETFs offer unsophisticated investors the opportunity to build a relatively sophisticated portfolio with few headaches and at substantial cost savings. Consider them seriously in your investment activities.
More From Investopedia
- 3 Steps To A Profitable ETF Portfolio
- The Benefits Of ETF Investing
- Target Your Retirement With Life-Cycle ETFs
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John Hancock Mutual Funds Launches Enhancements to Popular Web-based “Portfolio Insight” Tool for Financial Advisers
Source: John Hancock Funds
On Tuesday October 11, 2011, 10:00 am EDT
BOSTON, Oct. 11, 2011 /PRNewswire/ — John Hancock Funds has announced extensive enhancements to its popular web-based “Portfolio Insight” tool for financial advisers. Originally launched in mid-2009, the tool provides in-depth analytics and transparency into client portfolios. Advisers now have the ability to do comparative analysis for their clients of portfolio holdings including mutual funds and ETFs in a side by side format. The new Portfolio Insight “Compare” tool may be accessed at www.jhfunds.com/portfolioinsight.
By accessing the universe of more than 8,000 open-end funds and commodity and index ETFs via Morningstar®, advisers are able to generate a client-friendly report that helps facilitate conversations with clients about their portfolio and what next steps might be appropriate.
“Since the initial launch of Portfolio Insight two years ago, a top priority for us was to get feedback from advisers who do business with us and to make improvements based on what we heard,” said Keith F. Hartstein, President & CEO of John Hancock Funds. “We are committed to providing advisers with valuable tools and resources that will help them do more business, and we have had an overwhelmingly positive response from advisers to Portfolio Insight. They tell us that the tool is simple to use and their clients really appreciate the easy-to-read reports.”
“It is critical for advisers to provide their clients with transparency into their investments during uncertain times like we’re experiencing, and that’s exactly what Portfolio Insight allows them to do. Â The beauty of Portfolio Insight ‘Compare’ is the ability to input a current model or list of client holdings and then add or subtract funds or otherwise realign the portfolio and see an in-depth comparison of the original and new portfolios side-by-side,” Mr. Hartstein added.
The new and improved Portfolio Insight is available to advisers on John Hancock Funds’ award-winning web site, www.jhfunds.com. Â The firm will be launching a significant print and electronic marketing campaign in support of the new features in October.
“Portfolio Insight’s new ‘Compare’ feature offers an easy way for an adviser to add value by suggesting a change to a portfolio and then it enables the adviser to clearly show the change to the client. It also allows advisers to create personalized and customized reports for their clients quickly and efficiently. The result is a comprehensive, transparent view of a client’s holdings that can help build their confidence and advance a better understanding of their overall investment goals,” said Carey Hoch, Senior Vice President and head of Marketing for John Hancock Funds. Â
A new feature called “Fund Evaluator” helps Advisers identify John Hancock Funds that compare favorably to funds already in a client’s portfolio. “We are seeing more and more advisers use this feature to add John Hancock funds that complement an existing portfolio, or in some cases, to replace funds that may no longer be a good fit due to changing circumstances,” notes Eric Lachance, Assistant Vice President, head of E-commerce.
Portfolio Insight can include a portfolio snapshot summary along with performance analysis for the overall portfolio as well as each individual fund, sector and style analysis breakdown, and information on stock overlap among all holdings. Â In addition, economic and portfolio manager commentaries are available.
“While you can go deep into the portfolio information, it’s the ease of use that really makes this tool compelling,” added Ms. Hoch. “In just minutes, advisers can create customized reports for clients with information and insights that help differentiate them, while helping clients understand what they own and if they are on track.”
About John Hancock Funds
The Boston-based mutual fund business unit of John Hancock Financial, John Hancock Funds manages more than $71.5 billion in open-end funds, closed-end funds, private accounts, retirement plans and related party assets for individual and institutional investors as at June 30, 2011. Â
About John Hancock Financial and Manulife Financial Corporation
John Hancock Financial is a unit of Manulife Financial Corporation, a leading Canadian-based financial services group serving millions of customers in 21 countries and territories worldwide. Operating as Manulife Financial in Canada and in most of Asia, and primarily as John Hancock in the United States, Manulife Financial Corporation offers clients a diverse range of financial protection products and wealth management services through its extensive network of employees, agents and distribution partners. For more than 120 years, clients have looked to Manulife for strong, reliable, trustworthy and forward-thinking solutions for their most significant financial decisions. Funds under management by Manulife Financial and its subsidiaries were Cdn$481 billion (US$ȑ8 billion) as at June 30, 2011. Â
Manulife Financial Corporation trades as ‘MFC’ on the TSX, NYSE and PSE, and under ’945′ on the SEHK. Manulife Financial may be found on the Internet at www.manulife.com.
The John Hancock unit, through its insurance companies, comprises one of the largest life insurers in the United States. John Hancock offers a broad range of financial products and services, including life insurance, fixed and variable annuities, fixed products, mutual funds, 401(k) plans, long-term care insurance, college savings, and other forms of business insurance. Additional information about John Hancock may be found at www.johnhancock.com.
Ways to inflation-proof your mutual fund portfolio
CHICAGO (AP) — Warnings of high inflation ahead have been around so long it’s easy for investors to take them for granted.
Heavy government spending was supposed to have driven inflation sharply upward. Some experts predicted it would hit 8 percent by now.
So far, inflation is still tame.
However, the long era of low inflation likely is nearing an end. Prices have accelerated abroad due to super-heated economic growth in China, Brazil, India and other emerging markets. The U.S. consumer price index has risen by 0.4 percent in each of the last two months, too, increasing prospects that we will eventually have significantly higher inflation at home. Over the past year the index has risen 1.6 percent.
“Investors ignore inflation at their own peril,” says Christine Benz, director of personal finance at Morningstar Inc.
Even those who normally leave their mutual funds on auto-pilot would be well-advised to consider inflation-proofing their portfolios.
Ways to protect yourself include overhauling your mix of funds, paring back on riskier international funds and adding offerings that focus on inflation-protected bonds such as Treasury Inflation-Protected Securities (TIPS) — a type of Treasury bond whose payout is adjusted every six months for inflation. Investing in commodities funds and dividend mutual funds also may help.
Benz discussed the options and best moves for individual investors in an interview with The Associated Press. Here are excerpts:
Q: Why can’t investors rely on fund managers to mitigate the effects of inflation?
A: Not many managers spend a lot of time thinking about the macroeconomic environment, whether it’s inflationary, deflationary, recessionary or whatever. Instead, most hew to a specific style (such as growth, value, small cap, large cap). For example, it’s not typical for most core bond funds to buy TIPS. That means that investors who want to ensure that their portfolios have insulation against inflation should take steps to put it in place themselves.
Q: There aren’t any mutual funds composed of I-bonds — inflation-linked government savings bonds — so isn’t it better for inflation-wary investors to invest in TIPS?
A: Both TIPS and I-bonds are fine options.
I-bonds make good sense for investors’ taxable accounts in that they won’t owe federal income taxes from year to year — only when the bond matures or they sell. But with TIPS, investors are not limited to purchases of $10,000 per year as they are with I-bonds. By buying a TIPS fund you also get the advantage of professional management.
For plain-vanilla, low-cost possibilities, both the conventional mutual fund Vanguard Inflation-Protected Securities (VIPSX) and iShares Barclays TIPS Bond (TIP), an ETF, are solid. For an actively managed fund, investors might consider PIMCO Real Return (PRTNX) or Harbor Real Return (HARRX). For investors concerned that inflation is a global phenomenon, our analysts also like the exchange-traded fund SPDR DB International Government Inflation-Protected Bond (WIP).
Q: How effective are commodities in fighting inflation?
A: In theory, buying an investment that tracks commodities prices is a good way to hedge against inflation. As you’re paying higher prices for food, gas, and other stuff you need, an investment in commodities should also be going up, helping offset those higher costs.
Unfortunately, the best way to obtain pure exposure to commodities is to take physical delivery of the stuff — whether it’s pork bellies, cotton or oil — and that’s simply not practical for mutual funds. Instead, most commodities funds obtain exposure by buying commodity index futures, which don’t perfectly reflect commodity prices at any given point in time.
Q: With those shortcomings in mind, do you still recommend any particular commodities funds?
A: If investors are OK with that imprecision, they could look to an exchange-traded note like iPath DJ-UBS Commodity Index (DJP) or to actively managed commodity futures funds such as Harbor Commodity Real Return (HACMX) or PIMCO Commodity Real Return (PCRAX). (Traded on major exchanges, exchange-traded notes are a type of debt security that combines the aspects of bonds and ETFs.)
Q: Why should investors see dividend-stock funds as an inflation hedge as opposed to, say, bonds?
A: Stocks should be part of most investors’ inflationary toolkits because their long-run potential to beat inflation is much greater than is the case for bonds, and certainly cash. And dividend-paying companies offer an important advantage that fixed-rate investments like bonds don’t: If business is good, they can actually increase their dividends. Those higher payouts, in turn, can help offset higher prices.
Among our favorite dividend-growth funds are Vanguard Dividend Growth (VDIGX), a traditional actively managed mutual fund, and Vanguard Dividend Appreciation (VIG for the ETF and VDAIX for the traditional index mutual fund).
Q: Who should be thinking the most about adding inflation-fighting investments?
A: Retirees. Only a portion of the income that most retirees earn, such as their Social Security income, will automatically step up with inflation. The income they draw from their portfolios, by contrast, will be worth less and less as inflation increases.
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