This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Outperform Stock Market With Lower Risk

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert) -- Investors have become so accustomed to the notion of "risk on" and "risk off," many have cast aside one of the most hallowed principles of success. Reducing the possibility of loss (also known as "risk"), after all, requires assets that don't move in the same direction.

How does an ETF investor know whether his investments are zigging simultaneously, rather than zigging and zagging independently? There are a number of free Web tools, though I might recommend the Select Sector SPDR tracker for first-timers.

I often check correlation coefficients among ETFs in my client accounts. If there are too many high-positive correlations (0.75 to 0.99), I recognize the likelihood that those may not be distinguishing themselves from one another. If there are too many high-negative correlations (-0.75 to -0.99), I'm unlikely to be achieving anything more than what can be accomplished with two ETFs: SPDR S&P 500 Trust (SPY) and iShares Barclays 20+ Treasury Bond (TLT).

Constructing a portfolio that has seven or nine or 11 or 15 ETFs, each moving without regard to any other investment, each offering its own potential for financial gain, would be akin to discovering the Holy Grail. It's not going to happen. On the other hand, you can combine a variety of low-correlating assets that concomitantly reduce risk and outperform popular market benchmarks.

For instance, over the past six months, the S&P 500 SPDR Trust has returned 6%. That doesn't sound too shabby, although risking the entirety of one's capital on an all-stock portfolio can be terribly unnerving.

Over the same six months, a portfolio with equal amounts of these seven ETFs significantly outperformed the S&P 500. What's more, the "collection" did so with a fraction of the risk. (Note: The risk is lower, both in terms of an aggregate "beta" and in terms of diversification vis-a-vis low-correlating assets.)

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
BAB $30.54 0.00%
DJP $28.97 0.00%
EWL $34.61 0.00%
EWT $15.77 0.00%
PCY $28.67 0.00%

Markets

DOW 17,826.30 -279.47 -1.54%
S&P 500 2,081.18 -23.81 -1.13%
NASDAQ 4,931.8150 -75.9760 -1.52%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs