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