How should you set your portfolio benchmark?

on Aug 16, 2012 in Home, Portfolio ad hoc | 4,194 comments

When evaluating the performance of your portfolio, it’s essential to have a benchmark that most closely approximates the universe of your positions. Imagine your equity exposure on the Euro Stoxx 50 represents only 15% of your portfolio. You shouldn’t expect to replicate its performance or be surprise if you are lagging behind in a bullish phase. One of the frequent mistakes I have noticed when working with clients is that they don’t gauge their portfolio performance with the proper benchmark. Even if there will never be a perfect way to measure performance once your portfolio begins to get complex, comparing it to the most appropriate benchmark will still give you a much better idea of how it is actually running. Before you consider picking up a benchmark, you need to breakdown your portfolio into your mix of asset classes. Once the breakdown of your portfolio is completed, you can then begin to look for the appropriate benchmark or construct a weighted benchmark to measure it against. You may think for instance that the 1.5% return you’re receiving is meagre, but if you examine your portfolio closely, it may be doing exactly what it should be, based on its inherent...

Construct a well balanced all ETF Portfolio

on May 10, 2012 in Home, Portfolio ad hoc | 2,009 comments

An Exchange Traded Fund offers stock-like and mutual fund-like features. Its performance tracks an underlying index, which the ETF is designed to replicate. The difference in structure between ETFs and mutual funds are explained by the type of management style and investing characteristics. Because ETFs are designed to track an index, they are considered passively managed, that means low overhead, which translates into lower fees for investors, whereas mutual funds are considered actively managed. Consequently an ETF works well in providing exposure to specific slices of the market at a reasonable cost. The low cost of ETFs make them an ideal vehicle for implementing your portfolio management strategies. As competition among ETF issuers has heated up, fees have been under pressure, primarily targeting “plain vanilla” products in an effort to appeal to cost-conscious investors. Mutual funds can charge 1% to 3%, while ETFs are almost always in the 0.1% to 1% range. Over the long term, the cost structure can have a non-negligible impact on your return. In addition, ETFs are flexible investments vehicles, capturing a variety of stock market or economic trends without the risk of single-stock exposure. Furthermore, ETFs were designed for investors who believe that security selection fails to consistently add value and paying for pricey, active management does simply erode returns over the long run. For the long-term investor, an effective ETF strategy would be filling the asset allocation gaps and replacing higher-fee mutual funds. One of the most widely known ETFs is called the Spider, which tracks the S&P 500 index and trades under the symbol SPY. Other popular families of ETFs are the iShares family, branded and managed by Barclays Global Investors, the VIPERs family issued by Vanguard and the PowerShares family providing the popular QQQ. To sum up, you could easily develop a well-balanced, all-ETF portfolio that maintains exposure to all the major asset...