Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
America has Become a Police State - 19th Apr 14
Elite Herd Psychology And War By Default - 19th Apr 14
E.U. Officially Adopts the Bank Depositors Bail-In - 19th Apr 14
Goldman Sachs Is Highly Motivated To Low-Ball Gold Price - 19th Apr 14
Save MtGox - Bitcoin Important Implications of Going Down - 19th Apr 14
Stock Market SPX Topping Valuations - 19th Apr 14
Tesco Profits Panic! Back to Back £5 Off £40 Shop Voucher Promotions - 18th Apr 14
The Obama Game - Is Putin Being Lured Into a Trap? - 18th Apr 14
The Growing Threat to Capitalism - 18th Apr 14
Build Biotech Wealth on Solid Platforms - 18th Apr 14
Has Solar Power Finally Arrived? - 18th Apr 14
Bank Depositor Bail-Ins and Real Assets vs Liability-Based Assets - 18th Apr 14
10 Ways to Screw up Your Retirement - 17th Apr 14
One of Harry Dent’s Three Keys to Market Prediction is Cycles - 17th Apr 14
Obamacare Proof Stocks - 17th Apr 14
Gold, Silver And The Mining Sector: Prepare For A Severe Fall - 17th Apr 14
Hidden Australian Life Sciences Bio-tech Growth Stocks - 17th Apr 14
Disrupting Big Data Status Quo - 17th Apr 14
What the Stock Market Bears Have Been Waiting for... - 17th Apr 14
Copper Is Pathological and Suffers from SAD, but It Has Value - 17th Apr 14
Old World Order New World Order, Chaos And Change - 17th Apr 14
Even The US Government Will Abandon the U.S. Dollar - 17th Apr 14
Gold - Coming Super Bubble - 17th Apr 14
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

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


© 2005-2014 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

Free Report - Financial Markets 2014