There are many different portfolio strategies out there today making the decision which one to choose challenging. It’s also one of the most important decisions that can have a big impact on reaching your goals. I’ll give you a few ideas to think about and the reasons why you may want to consider one over another.
- The diversified index portfolio of low-cost ETFs. It’s a powerful portfolio because it’s often low cost, gets you invested in the market and reduces risk by spreading out your investments over various asset classes. A properly diversified portfolio can reduce the volatility– the highs and lows. When working towards a goal you’ll want to know a few main factors including how much to save, the time frame to goal and your target rate of return. The diversified index portfolio of low-cost ETFs may have a higher degree of predictability based on historical research than many other strategies.
- The enhanced index portfolio of ETFs seeks to invest in the securities with the fundamental characteristics that enable them to provide the greatest potential for capital appreciation. An example of an enhanced index portfolio would be if you took all the positions in the S&P 500, ranked them 1-500 based on a specific set of criteria and then eliminated the bottom 25%. You would still have some level of diversification but the potential for outperforming the index.
- The highly concentrated positions portfolio invests into only a few positions, is highly volatile and offers a much higher potential gain or loss. This strategy should be used with a high degree of caution since the potential for error is much higher. It requires a high degree of skill, time and patience. Investing in highly concentrated positions can have extreme changes in cash when investments are changed.
- The core and satellite portfolio uses a combination of the enhanced index and highly concentrated positions which can make for an effective strategy. The enhanced index portion provides some diversification and a place to invest while waiting for the opportunity of a satellite position. It’s important to understand the volatility of these positions and the risks in a strategy that is not completely diversified.
The key to understanding which portfolio is right for you isn’t just about which strategy will outperform. It’s understanding your risk tolerance and time frame. Investing in any of these portfolios for a short term goal may prove disastrous regardless of your tolerance for risk. It’s also a mistake to invest aggressively if your aversion to risk causes you to sell in a down market purely from an aversion to that very risk. A financial plan can be a great tool to help you stay rational during periods of uncertainty with your investments.