Equities
Stocks
Properly managing an equity portfolio is a relatively straightforward process that is often made overly complicated by many investors. Research on the stock market has found that equity returns are determined by three main factors:
- 20% of your return is determined by the individual stocks owned
- 30% of your return is determined by the sector of the stock market owned
- 50% of your return is determined by the extent of your exposure to the stock market
This means, a full 80% of your equity return can be captured by being properly diversified throughout the stock market. Most investors spend too much time trying to find the next “hot stock,” expending their effort on the least important and most difficult to capture component of their portfolio.
The critical role of diversification throughout the broad market is widely accepted among professional investors and money managers. To help investors diversify their portfolios, Morningstar, a well-known mutual fund rating service, categorizes most mutual funds into one of nine market segments. These nine market segments are represented by squares in the chart below. Using these categories as a guide, we can select funds in different market sectors to ensure adequate diversification of your
holdings.
Tools of the Trade
In order to properly structure your equity portfolio, we consider three main factors:
- Diversification In order to minimize risk over time, your equity portfolio should be well diversified. As a guideline, consider including investments from at least five to six market sectors over a minimum of three years.
- Expenses Transaction and management expenses, as well as capital gain taxes, can inhibit portfolio returns and should be minimized.
- Regular reviews Your asset allocation should be reviewed and rebalanced periodically to ensure that your portfolio holdings still match your investment goals, your time horizon, and your tolerance for risk.
To meet the above criteria we use three basic tools:
- Mutual Funds* Mutual funds offer a low cost way for investors to diversify their stock investments while also enjoying professional management. We identify and invest our clients assets in what we believe are the best mutual funds available, and combine these funds to create a diversified portfolio. We aggressively screen the universe of mutual funds for a number of important characteristics such as short and long term return relative to their benchmark, consistency to stay within their stated investment policy, tax efficiency, and cost. We also look for continuity of management.
- Exchange Traded Funds* Similar to index funds, exchange traded funds (ETFs) are passively managed stocks that track particular segments of the stock market. ETFs offer an alternative way for investors to address the need for diversification low expenses, minimal trading costs, and tax efficiency. Individual Stock We will advocate some individual stocks as a compliment to a well-designed core portfolio.
William S. Paddor is an investment advisor representative of Vanderbilt Advisory Services. Arlington Financial Services and Vanderbilt Financial Group are separate and unaffiliated entities. Vanderbilt Financial Group is the marketing name for Vanderbilt Advisory Services and its affiliates. Advisory Services offered through Vanderbilt Advisory Services For additional information on services, disclosures, fees, and conflicts of interest, please visit www.vanderbiltfg.com/disclosures