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more... Eight
Rules For ETF Success
by: Carl Delfeld Managing
a global portfolio of exchange-traded funds (ETFs) is a great way to build a diversified
portfolio with exposure to equities around the globe. Fortunately, you need not
be a rocket scientist to do this, but many investors fail to observe some basic
guidelines, and it can get them into real trouble. Follow these eight steps and
sleep easier. 1.
Liquidity Comes First: Before you even think of building an investment portfolio,
you should set aside about six months of income in a “rainy day” account.
This could be put into a money market fund or U.S. Treasury securities. Having
this money set aside will ease your mind and allow you to be more open and creative
with your global portfolios. 2.
Separate Portfolios: You should separate your core conservative portfolio from
your growth portfolios. With the core conservative portfolio, your top priority
is capital preservation, and growth is a secondary consideration. Your growth
portfolios are more speculative, with capital growth as the primary goal. 3.
Really Diversify Your Portfolios: You need positions in your portfolios that are
likely to offset each other as unexpected events and market movements become a
reality. This is not accomplished with different sectors of ETFs or a mix of small-cap,
mid-cap and large-cap ETFs. Rather the goal is to have some investments that are
on both sides of risks. For
example, if the U.S. dollar declines, have some investments in precious metals
or denominated in other currencies, such as Switzerland or Australia or Singapore
ETFs. If inflation heats up, have some investments that hedge this risk such as
timber, gold or Treasury inflation-protected bonds (TIPs). If political events
or policies in one country take a turn for the worst, it is helpful to have investments
in other well-developed countries to offset any loss of value. You get the idea,
spread your risk and avoid having one ETF account for more than 5%-10% of your
core portfolio. 4.
Be Careful Which Countries You Pick: You need some guidelines to help keep you
from getting carried away and having too concentrated a position in a particular
country or region. In particular, take a good look at the following: 1) the stability
and overall political and corporate governance; 2) the legal environment, respect
for contracts, low levels of corruption, due process and rule of law; 3) the macroeconomic
environment including fiscal discipline and currency strength; and 4) political
risks that could affect financial markets. Keep
in mind that the quality of the countries you choose to invest in is the primary
but not the only factor. The price or valuation of a country’s stock market
is also extremely important. Oftentimes, the best time to buy into a country’s
stock market is when it is beaten down, but there are signs that its economic
and political problems will sharply improve. If you have a long-term perspective,
you might consider annuities specially structured for ETF portfolios. 5.
Minimize Company Risk by using our “buy countries, not stocks” strategy.
Instead of trying to pick the best three stocks on the Tokyo Stock Exchange, why
not just minimize company risk by buying the iShares MSCI Japan Index, which tracks
the Nikkei 225 and spreads this risk across 225 Japanese companies. 6.
Monitor ETF Country And Company Exposure: Be careful to look under the hood of
ETFs to see where your money is going. For example, let’s look at the iShares
MSCI Emerging Markets ETF. It invests in 26 different countries, so it is natural
to think that you will get broad exposure to all 26 countries. You would be wrong:
50% of your investment in this fund is going to four countries: South Korea, South
Africa, Taiwan and China. In addition, incredibly, 7.5% is going to one company,
Samsung Electronics of South Korea. The
same is true for the MSCI Europe, Asia and Far East index. It contains 21 developed
countries, but 48% of the money you invest would go to just two: Japan and the
United Kingdom. Meanwhile, less than 1% would go to Singapore and Ireland! Country
specific ETFs such as the new iShares FTSE/Xinhua China 25 Index can also have
a fair amount of concentrated risk. Although the China ETF tracks a basket of
25 companies, the largest five companies account for nearly 50% of your exposure.
7. Cut
Losses With A Trailing Stop-Loss Policy And ETF Put Options: We have all been
there. You buy a stock or fund, and it appreciates in value rapidly. Then it stumbles
and begins to decline. What do you do? Should you buy more, let it ride, or sell?
Save yourself a lot of pain and agony by following a simple rule. If a position
ever falls more than 20% from its high, sell it immediately and reassess the situation.
If you invest in an ETF with a sizable downside risk, why not spend a few hundred
dollars to purchase a put-option as an insurance policy? 8.
Rebalance Your Portfolio: At least annually, you need to make some changes so
that you are not overly exposed to countries that have higher risk factors and
volatility. One way is by selling some shares of your winners and increasing exposure
to under performers. This accomplishes another goal, locking in gains and taking
some money off the table. Remember, only a fool holds out for top dollar, especially
in the more volatile emerging market countries. Building
your portfolios with low-cost, tax-efficient ETFs is a smart strategy, but don’t
set it on auto pilot.
To
learn more about setting up your ETF business click
here...
For
more information go to http://www.chartwellasia.com or call 877-221-1496 About
The Author
Carl Delfeld is head of the global advisory firm Chartwell Partners and editor
of the the "Asia-Pacific Growth" newsletter and is the author of "The
New Global Investor." For more information please visit http://www.chartwellasia.com
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