Investors should spend most of their time on overall asset selection and ignore individual stocks for the most part. according to research, about 95% of money managers’ performance can be explained by their selection of asset classes, not by their selection of individual stocks. Asset allocation is not necessarily easy, but it is less detailed and time consuming than stock picking, and it rewards the diligent investor handsomely.
ETFs are the ideal tool for the investor focused on asset allocation. They represent just about every asset class available and are cheap, liquid, and reliable. The primary asset classes in which ETFs are available include:Large Cap Stocks, Mid Cap Stocks, Small Cap Stocks, Growth Stocks,Value Stocks, Sector Stocks, International Stocks, Country, Emerging Market Stocks, Long-term Bonds, Mid-term Bonds, Short-term Bonds and Real Estate Investment Trusts. These and other asset class categories may be used together to obtain finer-grained asset classes. Thus small value stocks are an asset class in their own right, and ETFs are being created every month around these subclasses. Only investable, publicly traded companies are represented, and private firms are excluded.
An ETF that contains investments in different asset classes allows an investor to buy one ETF and get a fully diversified portfolio. Indeed, one of the greatest benefits of ETF investing is the cost structure. All things being equal, the lower one’s investing costs, the higher one’s investment returns. ETFs are the right vehicle for accessing stocks, bonds, currencies, commodities and real estate at the lowest cost costs possible.
For starters, ETFs offer one the ability to manage downside risk. And since risk is measured on the downside — risk being defined as the possibility of loss — one must actively protect against excessive losses. This is very easy to do with ETFs and individual stocks… simply by using trailing stop-loss orders.
Examples of asset allocation ETFs include: PowerShares Autonomic Balanced NFA Global Asset Portfolio (AMEX:PCA), PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio (AMEX:PTO)
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