Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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


© 2005-2022 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