Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
How I Learned to Stop Worrying and Love Market Fluctuations - 28th Aug 15
China's Yuan Devaluation: Why It Was "Expected" - 28th Aug 15
Stocks Go Nuts But the Question Remains – Will the Rally Stick? - 28th Aug 15
Fed’s Stock Market Levitation is Failing - 28th Aug 15
The Eight Energy Systems Driving The Stock Market Rout - 28th Aug 15
Silver Sold, then Squeezed - 28th Aug 15
U.S. Economic Fundamentals 'Look Good' - Bullard of St. Louis Fed - 28th Aug 15
Stock Market Margin Calls Mount - 28th Aug 15
Einstein, Physics, Gold and The Formula To End Economic Decay - 28th Aug 15
The 10 Best Stocks for Options Trading Plays in This Market - 28th Aug 15
Economics of a Stock Market Crash - 28th Aug 15
Currency Wars Detonate; Gold Refuses to Budge - 28th Aug 15
UK Immigration Crisis Hits New Record, Trending Towards Becoming a Catastrophe - 28th Aug 15
The Ultimate Cash-Management Guide - 27th Aug 15
Why a Fed Rate Hike Could Be a Blessing for Gold Prices - 27th Aug 15
Why Devaluing the Yuan Won't Help China's Economy - 27th Aug 15
Stock Market Trend & Trade Signal Of the Decade - 27th Aug 15
Keep Your Eye On the Gold and Silver Bear - 27th Aug 15
Refugees Expose Europe’s Lack Of Decency - 27th Aug 15
How to Profit from China's Currency War - 27th Aug 15
How China's Currency Policies Will Change the World - 27th Aug 15
Chinese Medicine not Impressing Dr Copper - 27th Aug 15
Novel Biotech Novel Technology Platforms with Dramatic Growth Potential - 27th Aug 15
China Stocks Bear Market Crash, Are We Near the Bottom Yet? - 27th Aug 15
Stock Market Crash Black Wednesday Rally Crushes the Bears - 26th Aug 15
VIX Shorts Being Squeezed While SPX Prepares for Another Decline - 26th Aug 15
Why China's Economy is Deteriorating - 26th Aug 15
Citizenship as a Weapon: Travel Controls and What You Can Do About It - 26th Aug 15
Gold and Silver - How To Manipulate a Market - 26th Aug 15
How to Make a Quick 20% When the Stock Market Crashes - 26th Aug 15
Why We Can’t Handle A Stocks Bear Market - State Budgets Will Implode - 26th Aug 15
Stocks Bear Market, Is This 1929 All Over Again? - 26th Aug 15
The One Trading Strategy You Needed for Stock Market Crash - 26th Aug 15
Second Chance To Buy Cheap Gold Mining Stocks - 25th Aug 15
Gold Facts and Gold Speculations - 25th Aug 15
The Stock Market Crash Season is Here… - 25th Aug 15
Liftoff Setback Leads to U.S. Dollar Pullback - 25th Aug 15
The Stock Markets Are Extraordinarily Volatile, Here's What to Do - 25th Aug 15
Israel: The Case Against Attacking Iran - 25th Aug 15
Saudis Could Face An Open Revolt At Next OPEC Oil Meeting - 25th Aug 15
How to Calmly Weather This Stock Market Downturn - 25th Aug 15
Stock Market Sound the Alarm - 25th Aug 15
Stock Market Meltdown - Dow Monday 1000 Point Crash then Rebound, What's Next? - 25th Aug 15
El-Erian: Stock Market Sell off Is Not 1998 or 2008 - 25th Aug 15
Gold the Ultimate Financial Crisis Insurance - 25th Aug 15
Stock Market Black Monday Crash Fizzles Out, Next Black Tuesday? - 25th Aug 15
Black Monday - Rolling A Wheelbarrow Of Dynamite Into A Crowd Of Fire Jugglers - 24th Aug 15
Playing the Chinese Trump Card - 24th Aug 15
Gold and Silver: Heading for a “Blue Screen of Death” Event? - 24th Aug 15
Japan Economy Clear Conclusions Concerning QE - 24th Aug 15
Stock Market Blockbuster Right From the Open... - 24th Aug 15
Silver And The Petrodollar - 24th Aug 15
Why the Stock Market Sell-Off Happened – and How to Make Money on It - 24th Aug 15
Stocks Correct, Panic Ensues. The End Of The World? - 24th Aug 15
Stock Market - The Sky IS Falling - 24th Aug 15
SP500, DAX, FTSE - When Stock Markets Talk, Pay Attention - 24th Aug 15
Stock Market Black Monday - Full Crash Alert! - 24th Aug 15
Stock Markets Implode as China Literally Explodes - 23rd Aug 15
Stock Market Bloodbath - The Feds Gonna Need A Bigger Balance Sheet - 23rd Aug 15
Stock Market Due For A Breather (But More To Go) - 23rd Aug 15
Stock Market 20% Bear Market in the Works - 23rd Aug 15
Ankara: the New Capital of Jihad, U.S. Policy for Strengthening ISIS - 23rd Aug 15
Will Rising Interest Rates Crash UK House Prices? - Video - 23rd Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

This Simple Step Could Save Your Investment Portfolio

Portfolio / Risk Analysis Oct 31, 2010 - 01:09 PM GMT

By: Jared_Levy

Portfolio

Best Financial Markets Analysis ArticleJust about every stockbroker, financial advisor or money manager worth their weight in salt knows that diversification is a major way to us to manage investment risk.

But here's what most -- professionals and retail investors alike fail to remember: Diversification doesn't just mean choosing to invest in different companies that do different things and that's it. Creating real diversity and ultimately protecting your investment portfolio involves a little more work, which amazingly, most professionals still get wrong.


Here's the one step that almost everyone misses...

The Tricks of the Diversification Trade
Sectors -- The oldest and most common method of diversifying your investment portfolio is by choosing stocks in different sectors. Sector diversification might look something like portioning your investments with 20% in financials... 20% in energy... 20% in retail... 20% in commodities... and maybe 20% in consumer-related stocks. This is just an example..

While the sector method may work, what if financials, commodities and energy are all highly correlated? Then you might have the majority of your account moving in tandem both up and down. In bullish times, that may be great... but when things go wrong are you protected?

Cyclical & Defensive -- Another method is to adjust and balance your accounts based on the type of stock it is , and its sensitivity to the economy. I agree with this method as well. The defensive names like Johnson & Johnson (JNJ:NYSE), Altria (MO:NYSE), Diageo (DEO:NYSE) and Proctor and Gamble (PG:NYSE) can be quite boring when the market is moving higher lower, these names can move lower as well. But they likely won't move down as far as other companies. (That's a hint to the secret!)

Growth Companies & Established Dividend Payers -- Both of these types of companies should be incorporated in your portfolio -- at the right times. Finding solid, established dividend-earners when stocks have been beaten up can offer you great yields. Growth companies can give you more of a leveraged exposure, perhaps amplifying your returns when they are bought at the right time.

All of these types of diversification are acceptable and should be considered. However, just because you are diversified using these methods doesn't mean that you are not going to feel the effects of a bear market if you don't employ this one tactic...

BETA (Portfolio Beta) -- You wouldn't believe how many investors overlook this one simple measurement. The "beta" of a stock tells us how the stock tends to react when the broad market is moving. Think about beta as a gauge of how sensitive your stock is to a bullish or bearish move in the market. It is an integral step if you want to truly diversify and balance your portfolio.
Beta = Relationship stock has to its underlying index

Beta of 1 means that if the index is up 1%, the stock will most likely be up 1%
Beta of 2 means that if the index is up 1%, the stock will most likely be up 2%
Beta of 0 means minimal correlation
Beta of -1 means that if the index is up 1%, the stock will most likely be down 1%

I put a large amount of credence into beta and combine it with other methods when I am looking to truly diversify. Even if you have a bunch of stocks in a bunch of different sectors, ifthe majority of them have a beta of 2-3, you have some serious exposure to market downturns, no matter the.

Finding Your Portfolio Beta
Some brokers actually offer tools that allow you to see your total investment portfolio's beta. But for those of you like me who want to know the math:

1.Simply find the betas for all your stocks
2.Multiply the stock's beta by the percentage of your total portfolio that stock represents
A stock with a beta of 2 that is 5% of your portfolio would have a weighted beta of .10 (2 X .05)

3.Add all the weighted betas together to arrive at your portfolio's overall beta
Be sure that you look at all of these factors if you are truly trying to diversify and minimize risk in your portfolio. If your portfolio beta is over 1, you are amplifying any moves the overall market makes.

P.S. If you want to learn more about beta, risk, volatility and some really amazing domestic and international strategies, we have made the audio recordings from our Las Vegas Summit available to the public. You can hear my presentation, plus all of our other esteemed editor's thoughts, on these MP3 and CD recordings.

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Source : http://www.taipanpublishinggroup.com/tpg/...

By Jared Levy
http://www.taipanpublishinggroup.com/

Jared Levy is Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.

Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange's youngest-ever members to become a market maker on three major U.S. exchanges.

He has been featured in several industry publications and won an Emmy for his daily video "Trader Cast." Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.

Copyright © 2010, Taipan Publishing Group


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History