Volatility will continue in 2012

by PATRICIA HolmesPersonal Finance

Even if the various troubled nations resolve their major dilemmas this year, investors should be ready for volatility to continue in 2012, Reuters reports.Even if the various troubled nations resolve their major dilemmas this year, investors should be ready for volatility to continue in 2012, Reuters reports.

Even if the United States solves its fiscal deficit, China successfully copes with its economic slowdown, and Europe survives its debt problems, analysts have arrived at a consensus that volatility will continue to be a problem next year, according to the media outlet. Long-term planning and portfolio diversification will be even more crucial as a result of these continuing market fluctuations.

Fran Kinniry, who is a principal in Vanguard’s Investment Strategy Group, told the media outlet that investors “need to develop an asset allocation plan and really try not to get the short-term market to run their emotions” if they are going to invest in the right way.

He added that exchange-traded funds are an attractive option because there is a selection to choose from and they have low costs.

One problem with diversification in such a down economy is that asset classes correlate more strongly than they do during times of expansion. The Motley Fool reports that analysts are not pointing to many asset classes as clear safe havens from market swings.

Why ETFs are gaining in popularity

by PATRICIA HolmesUncategorized

Exchange trade funds (ETFs) have been growing in popularity for various reasons, and young investors should definitely be aware of the benefits provided by these financial instruments

ETFs are financial instruments that invest into a bundle of assets and trade like stocks. One major benefit that they provide investors is exposure to assets and risk management strategies that previously required much larger initial outlays.

For example, an investor can purchase a share of a gold ETF for less than $200, compared to the thousands of dollars required to create a commodities account. Alternatively, a market participant can gain easier diversification by purchasing ETFs that invest in the S&P 500 Index and therefore offer exposure to a basket of blue-chip stocks.

Market experts have repeatedly promoted diversification as a means of reducing portfolio volatility. The strategy becomes less effective in down markets, as widespread fear and pessimism help to drive selloffs in financial assets that pushes them down together.

Investors can use inverse ETFs to short plunging indices during down markets to obtain returns when many other market participants are being forced to accept losses. 

REITs present many benefits

by PATRICIA HolmesUncategorized

Real Estate Investment Trusts (REITs) present many benefits for investors. REITs provide opportunities for strong dividends, portfolio diversification, protection from inflation and robust performance.

Commercial real estate sector

Data provided by the 2012 Research Magazine Guide to REIT Investing indicated that while economic growth in the United States slowed during the first six months of the year, one sector that managed to show encouraging signs was commercial real estate.

Performance

Many subsectors of commercial real estate fared well during the first six months of 2012, including apartments, warehouse, retail and office space. While vacancy improved gradually, the rents paid by these properties grew.

While the S&P 500 Index surged 9.49 percent during the first half of the year, the FTSE NAREIT All Equity REITs Index, which represents 128 firms in the industry worth more than $500 billion, spiked 14.91 percent.

Diversification 

During a time of high asset correlations, securities that provide diversification can certainly prove valuable. Between the years of 1991 and 2011, REITs had a 56 percent correlation with large-cap stocks. This compares to an 80 percent correlation between small-cap equities and large-caps during the period. During periods of substantial volatility, REITs can be helpful as they do not move closely with other equities.

Dividends

Equity REITs provide a strong stream of dividend income, due to their corporate structure and their continued collection of rents. These trusts generate the income by gathering rental income from tenants, and the fact that they are incorporated as pass-through entities means that they need to distribute at least 90 percent of taxable income to shareholders every year.

This requirement means that a larger share of their returns is attributed to dividends. The dividend payments made by REITs have generally been substantially higher than those paid by companies contained in the S&P 500 Index.

Protecting against inflation

Investors can utilize REITs to protect themselves from the costs of inflation. These trusts enjoy rents and property values that generally rise along with the price level, which helps the dividends paid by the trusts to increase over time. These gains help to provide investors with income even during periods of high inflation. 

Five new ETFs will be offered by fund provider Direxion

by PATRICIA HolmesPersonal Finance

Fund provider Direxion announced recently that it will soon offer five new exchange-traded funds (ETFs), with two of them becoming available in December and the others becoming available in January.

Direxion All Cap Insider Sentiment Shares ETF and Direxion Large Cap Insider Sentiment Shares ETF, which are both based around stocks chosen from different Standard & Poor’s indices, will start trading in December, according to Reuters.

Andy O’Rourke, director of marketing at Direxion, informed the media outlet that both of the funds that will start trading in December will take long positions in stocks being purchased by fund insiders and short stocks being sold by these same officials.

The fund provider will then offer three ETFs in January which are based on reacting to volatility. The new financial instruments will increase their allocation to cash when the volatility in the underlying indexes surpasses a threshold level and put more money back into equities after falling below this threshold level, the media outlet reports.

ETFs can benefit investors by giving them easy access to diversification with low fees. Young investors planning for events such as retirement can benefit form researching these financial instruments.  

Energy ETFs offer investors exposure to energy sector

by PATRICIA HolmesPersonal Finance

Energy exchange-traded funds (ETFs) can be useful to investors as they offer both diversification and exposure to the energy sector.

There are currently less than 20 funds that provide exposure to the energy sector, according to The Street. Although these securities can provide some diversification by investing in energy stocks, the sector is not without its challenges. Energy stocks suffer from volatility stemming from surging prices from 2008 to 2011.

These ETFs are based on indices from providers such as Dow Jones, Standard & Poor’s, MSCI and Barclays, the media outlet reports. Some of them seek to obtain better performance through active management.

Motley Fool and The Street have both provided recommendations in order to simplify investing for individuals who want to trade these securities. The Street has provided 10 recommended ETFs which are ranked based on factors such as liquidity and expense ratios, and its number 1 recommendation was PowerShares WilderHill Clean Energy ETF (PBW). This ETF is based on the WilderHill Energy Index and generally focuses on renewable sources of energy. Motley Fool recommended the Energy Select Sector SPDR Fund (AMEX:XLE) as its top pick.  

Designing the right investment plan

by PATRICIA HolmesPersonal Finance

While no single investment strategy is guaranteed to result in success, individuals can follow some simple steps to help achieve their goals.

The first step in any investment plan is to pick out objectives. A recent college graduate may be saving for retirement, while a person further along in their career may want to put money away for the college educations of their children or grandchildren, according to NewsCore.

The next task in investing is determining one’s risk tolerance. The factors that affect the risk tolerance of an investor are personal preference, investment horizon and the amount of capital available. A 22-year old college graduate planning for retirement will have a much longer time frame to work with than a sexagenarian who wants to retire within the next ten years. An investor working with a larger time frame could tolerate more risk than someone working with less time. Young investors need to be aware of the benefit that time is providing them. Their portfolios can suffer the fluctuations that the use of aggressive assets will entail. After waiting out the volatility, these investors might enjoy much higher returns than they would by using bond funds.

One crucial step in picking out a portfolio designed to meet one’s goals is diversification. Risk is inherent to investment, but diversifying one’s portfolio by including different asset classes or stock market sectors can help limit volatility.

One final consideration for investors is working with professionals. Even savvy professionals can benefit from getting another perspective on their plans.

Portfolio diversification effective in down market

by PATRICIA HolmesPersonal Finance

Investors have had to deal with paltry returns over the last few years, but diversification is still an effective tool. Diversification means combining different assets that do not correlate with each other, meaning they do not move together.

USA Today reports that the Standard & Poor’s 500 index yielded a meager 1.4 percent between January 1, 2011 and November 30, 2011, according to data provided by money management firm IFA.com. In contrast, an investor who created a portfolio including other assets, such as a 40 percent allocation to bonds, yielded 5.7 percent during the same time frame.

Equities have been particularly hard-hit since the Dow peaked in July of 2007. The media outlet reports that an investor who bought the best stocks of 2007 and held onto them during the ensuing recession would have a portfolio down 60 percent.

Although asset classes have a higher correlation in a bear market than in a bull market, diversification can provide benefits regardless of economic conditions. Young investors might benefit from researching this investment technique when participating in long-term planning.