ETF Expert

Is diversification really a free lunch? Is asset allocation truly the major determinant of portfolio performance?

In 2008, it didn't matter a whole heck of lot whether your diversified across available asset classes or not. Real estate, commodities, stocks and most bond types fell in value. What's more, the depreciation across all asset classes could be felt clear across national borders.

Worse yet, if you followed the textbook on annual rebalancing (i.e., buy more stocks and sell some bonds to get back to your target allocation), you only got burned again. January 2009 was bad for all of the major aggregate classes.

Bonds, even higher yielding ones in the iShares High Yield Bond Fund (HYG), fared better than the pack. In fact, they didn't deviate too far from the flat line.

Gold (GLD) may have finished the month with a 5.5% pop. Yet it wasn't enough to offset the deflationary pressures on oil and industrial metals. Commodities (DJP) moved lower in January.

Stock assets seemed to fall directly in line with risk premiums. Total U.S. stocks fell precipitously in the Vanguard Total Stock Market Fund (VTI), but the iShares EAFE Index Fund (EFA) and the Vanguard Emerging Market Fund(VWO) struggled even more.

Real Estate Trusts? Do we even want to go there?

On the one hand, the investment markets have victimized virtually every portfolio. Some of the pain might have been minimized with bonds as opposed to a heavy stock weighting. But let's face it… the only portfolio to maintain its purchasing power over the last 15 months is the one that employed the underside of the much-maligned mattress.

Although cash has been king, investors should understand that buying stocks, commodities or real estate trusts wasn't an error in judgment. The only error in judgment was the decision to hold rather than to sell.

Investors have to take a few big gains, lots of small gains and their fair share of small losses. Why? So that they don't suffer at the altar of the big loss.

I've spent 20 years imploring people to recognize the disastrous ramifications that can occur with buy-n-hold. I've had some success – in print, on the radio airwaves — persuading investors to see the danger of a "do-nothing" approach.

So it is indeed refreshing to see one positive come from the market meltdown; that is, investors as well as advisers are finally questioning "buy-n-hold." (See the CNBC piece entitled, "The Market's Latest Victim: 'Buy-And-Hold Strategy."

Ironically, the mere fact that so many people are questioning the wisdom of holding stocks for the long run should provide a pop for the markets. If you get the rest of the folks to sell, the smarter money will begin looking at Microsoft with a P/E of 9.

If you've done it reasonably well… or even if you haven't… you should have a much higher percentage of cash at the present. You can start to look at the next 6-12 months as an opportunity to incrementally purchase or "average-in."

If the markets stay range-bound, you'll likely keep the beaten-down assets that you acquire.  On the other hand, if you get a major bear rally or new bullish environment, you might take some profits. Don't think that a new bull market means returning to buy-n-hold… because you'll only find yourself on the wrong side of long-term success.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.