DIVERSIFICATION
Let's assume that you have just received a stock tip from one of your golf partners. You take all of your small nest egg, $10,000 and buy it. In two months, the stock is down 50% or more (not unheard of since March 2000). Your $10,000 is now worth $5,000 or less. Another example might be that another golf buddy suggests three different stocks and you invest $3,333 into each. Two months later one is up 25%, another is even and one is down 50%.
That is the power of diversification, it can go a long way in reducing risk. In the above examples the stock may all have been small cap growth stocks. You might further reduce risk by allocating between growth and value stocks. You could further diversify by weighting between small cap, mid cap and large cap stocks. You could also diversify into real estate and possibly preferred stock for income. You get the idea "Never, ever put all your eggs into one basket", so said the tech investor in 2002. |
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Portfolio 1 | Portfolio 2 | Portfolio 3 | Portfolio 4 | |||||||||||||
Wilshire 5000 Index | 100% | 60% | 50% | 45% | ||||||||||||
Lehman Aggregate Index | 40% | |||||||||||||||
DFAUS Large Cap Value Portfolio |
15% | 15% | ||||||||||||||
DFAUS Micro Cap Portfolio |
15% | 15% | ||||||||||||||
DFAUS Small Cap Portfolio |
15% | 15% | ||||||||||||||
DFA International Small Cap Portfolio |
5% | 10% | ||||||||||||||
Total | 100% | 100% | 100% | 100% | ||||||||||||
*Annualized Return | 9.70% | 9.02% | 11.61% | 11.01% | ||||||||||||
Annualized Standard Deviation | 14.99% | 9.24% | 14.75% | 14.13% | ||||||||||||
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EXCHANGE TRADED FUNDS |
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Hence ETFidea, LLC was formed in August 2002 and became a Registered Investment Advisor with the State of New York in October of 2002. |