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