The Big Picture For The Week Of November 27, 2005

In this week's Barron's there is a roundtable (subscription required) of sorts about the hedge fund industry with three panelists.

Among other things each of the three recounted what strategies have worked well for them this year and which ones have not. They talked about things like distressed investing, covertible arbitrage and and merger arbitrage.

Hedge funds-like strategies are starting to become more accessible with smaller minimum investments and through more outlets. Hedge funds are a hot area, there is a lot of new money going into them which causes the markets chased to become more efficient. As an example if ten years ago there were 50 investors out there to arb a merger like JNJ (client holding) and Guidant, today there might be 250 chasing the same type of deal. This causes the spread to close quicker making it more difficult make money. This is just an example, my numbers could easily be wrong.

I don't know if the outcome will be some sort of investment apocalypse or not but the old requirements that used to be in force for hedge fund investing were there for a reason.

The demand (or maybe I have it backwards and should say the supply) for more exotic investments is to me a clarion call to make things simpler not more complex. This could be important.

A do-it-yourselfer, just getting started might want to think about something as simple as;

• 40% Rydex S+P 500 Equal Weight (RSP)
• 30% iShares Dividend Select (DVY)
  
• 20% PowerShares Intl Dividend Achievers (PID) this is the foreign DVY
• 10% Any emerging market ETF

This could be for the equity portion of a portfolio. It is not overweight mega cap stocks, picks up a market equivalent yield with plenty of foreign exposure. Its simple and captures many effects. The first (of many) flaw I see is it will no real exposure to commodities but the idea of a four or five holding portfolio is appealing for people that do want to keep it very simple and not spend too much managing their portfolio.

The specific allocation above is not the point but the concept of simple at a time when so many other people are looking for complex is the point.

I absolutely believe value can be added by actively managing a portfolio, a decent percentage of the time (whether you do it on your own or hire someone), with enough diligence. Just because that might be so doesn't invalidate something low maintenance and simple.

I have been particularly inspired by simple lately due to what seems to be a step up in innovative ETFs. This leaves me steadfast in my belief that do-it-yourselfers who have no intention of ever hiring someone like me (which is most people) will have a much better shot of getting to where they need to be financially.