The NY Times had an article over the weekend which touched on something I have written about countless times. It was about do-it-yourselfers now having access to asset classes that were not easily available previously. The article mentions currency, private equity, the water ETF (which is a personal and client holding) but does not mention commodities which of course are now much easier than before with even more products on the way.
I am a big believer in learning about new products and asset classes and where appropriate, integrating them into a diversified portfolio. I should note that the article included a quote from someone at Morningstar saying these are a bad idea, what a shock.
I will agree with the naysayers that the new products represent a great chance to over manage and get hurt. It is a certainty that some investors, both do-it-yourselfers and pros, will misuse these products. Many folks probably should not use them but that is more about experience combined with the ability to spend time studying.
I think these products, if they are going to be used at all, should be used to help diversify a portfolio. Most stock investors, me included, probably don't have the enough experience to build and manage a commodity portfolio. However realizing the potential diversification benefits of a little commodity exposure and learning the supply and demand characteristics of one or two commodities is not such a stretch, in my opinion.
Some clients own the Swedish krona CurrencyShares (FXS), some own Australia (FXA) and some own both. Staying in touch with the fundamentals of both currencies requires studying more than just their respective economies; it also means studying their respective regions and their roles in the world economic order. I think that owning these without some sort of plan for ongoing study is a speculation. Speculating does not have to be a bad thing but it is a different type of trade and probably not right for most folks. I personally own FXS and FXA.
The biggest thing, if you are going to use some of these newer (to retail investors) types of products is to use them in moderation. I say this over and over yet still many investors do not grasp how important this is. I think back to the commenter who said he had 25% of his portfolio in NUVO when it dropped 80%. While it is unlikely a currency can cut in half it is not unprecedented. If your intention is not to speculate but to create diversification you should revisit your weighting in not only these sorts of products but all your holdings.
Wikinvest Wire
8 comments:
Roger,
Even more shocking than your comments were some comments made in the weekend Newspaper Magazine by Jim Cramer. Cramer is quoted as saying that the average investor should NOT own any foreign equities or funds because "there are too many unknowns". Cramer must be referring to those investors who don't know the difference between a stock and a bond but it's still pretty insane advice in this day and age.
i think there must be a context thing here. accoridng to my daily email from flyonthewall.com cramer profiled his favorite foreign stocks, three of which i own for clients.
i don't watch his show so i can't vouch firsthand that he talked about foreign.
Roger,
Cramer's quote was in the USA Weekend Magazine insert in the Sunday Courier. This is intended for a very different audience than his TV show. Much less sophisticated. The direct quote is : Investing in foreign markets "aren't worth the risk, Cramer warns, because you're dealing with a lot of unknowns". Cramer then states that Mexico is an exception and a "good bet".
Personally, I think publishing broad brush statements like that in a newspaper magazine read by the masses is a bit irresponsible, to say the least.
maybe i should get the courier??? haha
if the audience was very unknowledgable investors, there is an argument that they should have foreign, broadly speaking, because they might be less likely to know when to move into foreign. maybe.
I don't think i can agree with advising someone to not diversifiy properly regardless of how much they know. at a minimum someone can own three funds, domestic, foreign and fixed income.
Roger,
Your comments regarding the time required to properly study (and keep up with!) some of the more advanced themes, namely commodities and currencies, is spot-on. It would be completely foolish and dangerous for someone like me to dabble in commodities, or attempt a carry trade. But now I have access to these themes, via DJP and DBV. While these products can still be abused and misused, that is true of all asset classes.
I can remember going to a neighborhood A&P with my Grandmother (this was a very long time ago, folks) and she was discussing a new Kroger Supermarket that was going to open in the area. The A&P clerk said the Kroger's would never succeed because all his customers depended on his advice on what groceries to buy, and that was not available in the supermarket.
There are Luddites in every generation.
OG
Roy, I do think people can manage one or two exposures in this area.
OG, M-star has no incentive to be insightful or cutting edge in their thinking.
Roger,
How about expanding on your opinion of M-star. I am a subscriber but not a disciple. I have read several of your comments that seem critical but after searching your blog with key word Moringstar can find no column length exposition. Thanks
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