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Jonathan Clements, who writes the Getting Going column on The Wall Street Journal, recently celebrated his 1000th column. In his milestone piece, Mr. Clements reflected his journey of the past 1o years for writing the Getting Going and summarized what he has observed from the developments in the financial industry in the past decade.

According to the article, Mr. Clements is a firm believer of investing in low-cost index funds, which can essentially be simplified to a three-fund portfolio: a US equity fund, a world equity fund, and a bond fund. While these three funds can, and should, be the core investments for any investor who wants to build a diversified portfolio, adding new elements, especially specialty funds offerings in the form of exchange-traded funds (ETFs), to the mix properly can reduce investment risk, which will in turn reward investors with healthy long-term performance.

But new, exotic ETFs are be introduced every day and some disappeared as quickly as they came out, how should regular investors embrace the flood of new investments? Mr. Clements offered his rules in the article that I think are quite useful:

  • Stick with specialized index funds that you can see holding for the long-term. WisdomTree International Real Estate Fund makes the cut. WisdomTree International Consumer Non-Cyclical Sector Fund doesn’t.
  • Add specialized funds in quantities that won’t leave you desperately unhappy if the market goes against you. Given that we’re talking here about volatile sectors like emerging markets and REITs, earmarking maybe 5% of your stock portfolio for each is probably plenty. As you add funds, write down your new target portfolio, spelling out what percentage of your money will be invested in each.
  • Look to rebalance regularly, adding to those funds that have fallen below their designated percentage and lightening up on highflying funds that are above your written targets.
  • When everyone’s ebullient, build your new fund positions slowly. You don’t want to be making short-term market predictions. But you also don’t want to be throwing great wads of money at overheated sectors.
  • So when should you add new funds? That brings me to my final rule. Purchase new funds not for their return potential, but because they will reduce risk.

What do you think?

Source: Jonathan Clements' Suggestions for Specialty ETFs