| A current theme among Wall Street wealth | | | | Where to focus your alpha energy? |
| managers is for individual investors to have | | | | Investments in real estate, commodities, and |
| index funds as their core holdings and to | | | | energy are less correlated with the stock |
| focus the remainder of their assets in high | | | | market (although I've never thought |
| alpha investments, which will produce returns | | | | commodities were suitable for individual |
| not correlated with the market. | | | | investors). |
| | | | |
| A quick digression for those of you who | | | | The Wall Street pros also recommend stock |
| aren't familiar with alpha and beta. In | | | | fund mangers who have unique strategies and |
| traditional finance, return not correlated | | | | can demonstrate a high alpha relative to the |
| with a broad market index, such as the S& P | | | | market (and, of course, positive relative |
| 500, is referred to as alpha. | | | | performance). |
| | | | |
| The return which is correlated to the market | | | | Ask your investment adviser for suggestions. |
| is beta. An index fund should have the same | | | | The alphas for individual mutual funds (and |
| return (positive or negative) as the index it | | | | individual stocks) are available from some |
| mimics. (One of the controversies | | | | brokers and online premium services. |
| surrounding some ETFs is their performance | | | | |
| has not tracked their underlying index.) | | | | Alpha and index fund investing makes a great |
| | | | deal of sense. You know what to expect in |
| The theory behind Alpha and Index Funds is | | | | terms of risk and return when you invest in |
| multi fold: 1. the major indices are a good | | | | an index fund. |
| place for an investor to be, both from a risk | | | | |
| and return perspective; 2. you can't | | | | Having a portion of your portfolio in index |
| outperform the major indices, so don't waste | | | | funds leaves you free to concentrate your |
| your time; 3. find those investment niches | | | | investment time and energy (think alpha |
| with high alphas to increase your return and | | | | waves) on those investments which can make a |
| reduce the overall risk in your portfolio. | | | | difference. |
| | | | |
| Even if you don't subscribe to this theory, | | | | Picking high alpha investments, which by |
| you might find it an interesting exercise to | | | | their nature are less correlated with the |
| review the alphas -- every investment has one | | | | stock market, should reduce the risk |
| -- of your current holdings. They will tell | | | | volatility of your portfolio and, depending |
| you something about the correlation and | | | | upon the investment, provide above market |
| diversification of your portfolio. | | | | returns. |
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