Weekly Market RecapThis week saw mixed economic news in the US. Employment data, factory orders and economic survey data were all generally strong in our view, as they have been for many months. However, the US trade deficit was weaker than expected. A possible import backlog from the west coast port strikes may have contributed to this, making the weaker number temporary. Internationally, growth forecasts for Europe were revised up slightly by the European Commission, but concerns remain over Greece's negotiations with other members of the Eurozone. In the UK election this week, the right wing Conservative party were returned to power with a majority. We also wanted to take some time this week to touch on how stock picking impacts diversification. It is a question we are often asked and the answer is often misunderstood. Stock picking can present more risks to your savings than you may realize. The most obvious one is that your investments may not be well diversified. Typically, financial models suggest a portfolio needs about 50 stocks to spread out risk reasonably well. However, this is is only a rule of thumb, those 50 stocks need to represent the broader market, and many portfolios have unintentional bias to them. For instance, if you're a doctor, you may have an unintentional bias toward healthcare stocks. Many investors will be biased towards consumer stocks, like Apple, rather than enterprise companies like Cisco. It's also very common to hold more stock in your employer than you should from a diversification standpoint. Finally most US investors hold more stock in US companies than is appropriate as research on home bias would objectively suggest. As a result, even 50 stocks isn't always getting investors where they need to be on the risk/return spectrum. So, even if you have a large number of stocks in your portfolio, you may be unintentionally taking more risk than you realize. Unfortunately that risk may only become obvious during bad markets. A portfolio you thought was diversified offers less downside protection that you might have expected. Also, remember that even though diversification becomes reasonably good at 50 stocks, it continues to improve as more stocks are added. Some of the ETFs we recommend contain thousands of individual securities within them. Why settle for just 50? Another issue with stock picking is simply that the costs add up. The direct costs in commissions and bid/ask spreads, the indirect tax costs of buying and selling too frequently and, of course, the cost of your time. Until fairly recently, selecting stocks was a necessary evil. You had a choice between expensive advisors, high fee mutual funds or the painful process doing it all yourself. However, in the past 20 years, the rapid growth of ETFs has changed the picture, and we believe investors can now diversify cheaply and easily. Our recommended portfolio of 12 asset classes provides access to 20,000 unique stocks and fixed income securities depending on the mix of funds recommended. It's time to both better diversify and invest more efficiently. Disclaimer: Your Portfolio Summary
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Sunday, May 10, 2015
Your Weekly Update - US jobless claims at 15 year lows
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