Tag Archives: Index Funds

What Is Asset Allocation?

By Selena Maranjian

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April is Financial Literacy Month, and our goal is to help you raise your money IQ. In this series, we’ll tackle key economic concepts — ones that affect your everyday finances and investments — to help you make smarter choices with every dollar decision you face.

Today’s term: asset allocation.

In the most basic sense, asset allocation is simply how one’s assets are divided among different asset classes, such as cash, stocks, bonds, real estate, and so on — even insurance investments, commodities, collectibles, and other categories count.

But the term also refers to an investment strategy — one that can reduce risk through diversification.

Clearly, having all your money in any one asset class can be risky. In 2008, the S&P 500 plunged 37 percent. If you’d held all your assets in an S&P 500 index fund, your net worth would have taken a big hit that year. (It’s worth noting, though, that long-term investors who held on regained those losses.) That was also a time of falling real estate values, and had you been a big property owner, especially in some particularly hard-hit regions, you’d have suffered a big blow, with our national housing market only recently starting to pick up again.

Given the harrowing ride we’ve been on in recent years, you might think that holding cash is the best way to protect your assets from outside forces. Think again.

Cash’s buying power tends to shrink every year, due to inflation. Given the inflation we’ve experienced between just 2000 and 2012, something that cost you $100 in 2000 would cost you about $132 today. Dollars stashed in a mattress are shrinking dollars.

Even dollars kept in savings accounts these days are problematic, given our low interest rates. If you’re earning even 1 percent in interest, but the inflation rate is around the long-term average rate of roughly 3 percent, then you’re losing ground by 2 percent annually. Bonds can offer a guaranteed return, but they too sport low interest rates today, and bond prices can fall over time, too.

Allocation in Action

There is no one-size-fits-all perfect asset allocation model. What’s good for you might be less so for someone else, due to the current size of your nest egg, your risk tolerance, your years until retirement, and other considerations.

One thing that everyone should do, though, is rebalance their portfolio, to maintain the desired allocation. That’s because over time, an allocation will likely change.

Imagine this simple example: If your assets are split equally between stocks and bonds, and over three years your bonds hold steady, but your stocks double in value, your allocation will no longer be 50-50. It will be 33-67, with stocks making up much more of the overall portfolio.

Some advisers

From: http://www.dailyfinance.com/2013/04/12/asset-allocation-definition/

5 Offensive and Defensive Funds to Strengthen Your Portfolio

By Dan Caplinger

bull market stocks offensive defensive funds

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Richard Drew/AP

Investors are getting more excited about the stock market now that it has fully recovered from the financial crisis and started to set new record highs. But if you’re looking to invest now, you have to protect yourself from the possibility that the long bull market could reverse itself.

It’s always tough both financially and psychologically to recover from immediate losses on investments you just bought, so taking steps to avoid big losses is well worth the effort.

With that goal in mind, here are five exchange-traded funds that can strengthen your portfolio against the threat of a possible stockmarket decline while still giving you exposure to further gains if the bull market continues.

iShares MSCI USA Minimum Volatility (USMV)
This ETF seeks out stocks that tend to rise and fall more gently than the overall stock market. With a concentration on health-care stocks like Eli Lilly & Co. (LLY) and consumer-oriented stocks like cereal giant General Mills Inc. (GIS), the iShares ETF focuses on stocks with defensive characteristics that hold up well under any economic environment. That won’t keep the fund from losing money in a falling stock market, but it should help reduce the extent of your losses. And with low costs of just 0.15 percent annually, the ETF doesn’t charge a ton to give you that protection.

PowerShares S&P 500 Low Volatility (SPLV)
Like the iShares ETF above, this fund focuses on low-volatility stocks in defensive industries. But the mix of investments in the PowerShares ETF is different, as it concentrates largely on utility stocks, which make up more than 30 percent of the fund’s portfolio right now. Utility giants Southern Co. (SO) and Consolidated Edison Inc. (ED) provide strong dividend income, and their ability to rely on regulated income from millions of utility customers gives them security even when the economy starts to falter. The fund’s costs of 0.25 percent per year are a bit higher than the iShares ETF but are still reasonable for ETFs generally.

PowerShares S&P 500 BuyWrite (PBP)
At first glance, this ETF looks a lot like a typical index-tracking fund, owning Apple Inc. (AAPL), ExxonMobil Corp. (XOM), and many of the other big companies in the S&P 500. But the twist this ETF uses is to write covered call options against that stock, boosting income at the expense of giving up some of the upside in its stock holdings. During bull markets, that strategy underperforms the overall market, but it produces more favorable results when stocks decline. With expenses of 0.75 percent, the strategy is a bit pricey, but it’s still an interesting way to protect against the full impact of a downturn.

iShares S&P Preferred (PFF)
Stocks come in two flavors: common and preferred. …read more
Source: FULL ARTICLE at DailyFinance

Ask a Fool: Index Funds vs. Managed Funds

By Robert Brokamp, CFP, The Motley Fool

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In the following video, senior advisor to the Motley Fool’s Rule Your Retirement service Robert Brokamp takes a question from a Fool reader, who asks, “My 401(k) has an S&P 500 index fund with an expense ratio that is only 0.05% and has a return of 6.85% so far this year. My other fund has an expense ratio of 0.93% and only returned 4.19%. I’m paying more to get less return! Any suggestions?”

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The article Ask a Fool: Index Funds vs. Managed Funds originally appeared on Fool.com.

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Source: FULL ARTICLE at DailyFinance

Target-Date Funds: Same Dates Can Earn Wildly Different Returns

By Dan Caplinger

Target mutual funds

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In recent years, target-date mutual funds have grown substantially, with savers investing $55 billion into the funds last year in the hopes of getting easy exposure to every asset class you need for a diversified portfolio.

Their popularity is understandable: Different funds focus on different target dates, the idea being that you pick whichever date is closest to when you’ll need your money back. When that date is far away, the fund invests aggressively, with most of its money going to…

Target-Date Funds: Same Dates Can Earn Wildly Different Returns originally appeared on DailyFinance.com on 2013-02-11T13:20:00Z.

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Source: FULL ARTICLE at DailyFinance