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Stock Picking, Intricate As Love

The combination from creating a 20 stock portfolio is a number beyond this earth. A simpler indexing approach provides several benefits like low unsystematic risk and low cost. You can still be active and pursue a source of alpha while also retaining the benefits of index investing. In ABC’s ‘The Bachelor’, the road to love involves weeks of flirting, romance, cat fights, twist and turns, where one guy is introduced to 25 lovely girls. Picking 1 out of 25 girls must be a lot of work. Likewise, researching stocks is a lot of work and arguably not as fun as dating. But you have many choices. The S&P 500, often used as a proxy for the total US stock market, offers 500 choices. If one were trying to create a 20 stock portfolio, how much work would be appropriate and what are the possibilities? Instead of trying to quantify the workload necessary, an especially subjective matter, let’s gauge the implications of the variables involved in picking stocks by looking at all the resulting combinations that are possible. For our group of stocks, let’s take the S&P500, consisting of 500 individual stocks. To take out capitalization weighting effects, we will actually use the S&P 500 equal weighted index, which includes the same constituents as the capitalization weighted S&P 500. Picking a certain number of stocks out of 500 is a simple calculation using binomial coefficients, mathematics used since the 10th century in India. Binomial coefficients are a family of positive integers that occur as coefficients in the binomial theorem. The coefficients that appear in the expansion are usually written as: This method is applicable because selecting stocks from a group is essentially picking k objects from a population of n distinct objects without replacement and without regard to order. If we select 20 stocks for our portfolio, there are 266719851283743829654740530950952475 combinations of selecting 20 stocks out of a group of 500, calculated from simply applying binomial coefficients: To grasp the magnitude of this amount, if each combination was the height of a flat dollar bill, the stack of dollar bills would scale up from the earth to the sun about 195 quintillion times. (quintillion is a billion billions). Likewise, the stack of dollar bills would go from our Sun to its nearest star, Proxima Centauri 726 trillion times. Comparatively, if the Voyager 1 spacecraft (speed=38000mph) were to go to Proxima Centauri, it would take over 73 thousand years to arrive. The many different possible portfolios are staggering, even when limiting selection only within the S&P500. With so many, inevitably one combination, picked arbitrarily at random could beat a combination created by a professional. This sheds light on the often heard claim that a monkey can out-pick a mutual fund manager. But nobody should pick stocks, bonds, or other securities at random. You wouldn’t pick your next boyfriend, girlfriend, potential spouse at random. You would expect a better outcome if you are discerning in your selection. Accordingly, thousands of discerning mutual fund managers seek superior performance and some actually achieve it. Of course, magazines like Forbes report time and again that the majority of professional can’t beat the index. However, the Wall Street Journal ran an expert vs. random dart throwing simulation for 14 years, but declared no clear winner. No clear winner will ever be discovered in this holy war, because of the staggering number of possibilities. One way to simplify investing is to invest in the index. Indexing provides several benefits like low cost and low unsystematic risk, even lower than a 20 stock portfolio. You do not have to be entirely passive. Instead of being active in the securities selection layer, another approach is to be active at asset allocation layer, using index investing. (click to enlarge) When constructing your portfolio, consider where you should put most of your effort. One approach employed by many professionals focuses on a top-down investment strategy attempting to exploit opportunities among a set of assets, positioning a portfolio into assets or sectors that show the most potential for gains. The strategy focuses on the relative performance of asset classes rather than on the performance of individual securities. With more focus on the asset allocation layer, one can still seek a source of alpha while also retaining the benefits of index investing. Further, the derivative securities used to actively asset allocate are highly liquid and low cost to transact for example, (NYSEARCA: SPY ),(NYSEARCA: EFA ),(NYSEARCA: BND ). Additional disclosure: Article is for educational purposes only and does not constitute financial advice.

Resolve To Focus On Goals Rather Than Results In 2015

Results, results, results. We frequently hear that we should focus on results. More often than not, focusing on results is a waste of time. Because it is looking in the rear-view mirror, rather than the windshield. Someone asked me today what I thought of Janet Yellen as head of the Federal Reserve. I found this hard to answer. Even though Chairperson Yellen has been in the job since February, her job as lead policy-setter has almost no short-term ramifications. It takes quarters – not months – to see the results of those policy decisions. Even after a year in office, it is very difficult to render an opinion on her performance as Fed leader. The fantastic 5% growth in the U.S. economy last quarter has much more to do with what happened before she took office – in fact, years of policy setting before she took office – than what has happened since she became the top Fed governor. We often forget what the word “results” means. It is the outcome of previous decisions. Results tell us something about decisions that happened in the past. Sometimes, far into the past. We all can remember companies where looking backward all looked well, right up until the company fell off a cliff. Circuit City. Brach’s Candy. Sun Microsystems. Further, “results” are impacted dramatically by things outside the control of management, such as: Changes in interest rates (or no changes when they remain low) Changes in oil prices (which have been dramatically lower over the last 6 months) Changes in investor expectations and the overall stock market (which has been on a record-setting bull run) Inflation expectations (which remain at historical lows) Expectations about labor rates (which remain low, despite trends toward higher minimum wages) Technology advances (including rapid mobile growth in apps, beacons, payments, etc.) We too often forget that last quarter’s (or even last year’s) results are due to decisions made months before. Gloating, or apologizing, about those results has little meaning. Results, no matter how recent, are meaningless when looking forward. Decisions made long ago caused those results. “Results” are actually unimportant when investing for the future. What really matters are the decisions being made today, which can cause future results to be wildly different – better or worse. What we need to focus upon are these current decisions and their ability to create future results: What are the goals being set for next year – or better yet, for 2020? What are the trends upon which goals are being set? How are future goals aligned to major trends? What are the future expected scenarios, and how are goals being set to align with those scenarios? Who will be the likely future competitors, and how are goals being set make sure the organization is prepared to compete with the right companies? Far too often, management will say, “We just had great results. We plan to continue executing on our plans, and investors should expect similar future results.” But that makes no sense. The world is a fast-changing place. Past results are absolutely no indicator of future performance. For 2015 and beyond, investors (and employees, suppliers and communities sponsoring companies) should resolve to hold management far more accountable for future goals and the process used to set those goals. That Amazon.com maintains a valuation far higher than its historical indicates it should, primarily because it is excellent at communicating key trends it watches, future scenarios it expects and how the company plans to compete as it creates those future scenarios. In the 1981 Burt Reynolds’ movie ” The Cannonball Run ,” a character begins a trans-country auto race by ripping the rear-view mirror from his car and throwing it out the window. “What’s behind me is not important,” he proudly states. This should be the 2015 resolution of investors and all leaders. Past results are not important. What matters are plans for the future and future goals. Only by focusing on those can we succeed in creating growth and better results in the time to come.

2 iShares ETFs To Participate In The NYSE Incentive Program

Summary As of Jan. 2, 2015, two iShares ETFs will start participating in the NYSE Arca ETP incentive program. What is the incentives program? How the incentives program will help provide liquidity and help investors execute more efficient trades. BlackRock (NYSE: BLK ), the world’s largest asset manager and parent company of iShares, the world’s largest issuer of exchange traded funds, said today that as of Jan. 2, 2015, two of its ETFs will start participating in the NYSE Arca ETP incentive program. The iShares Interest Rate Hedged High Yield Bond ETF (NYSEArca: HYGH ) and the iShares Asia/Pacific Dividend ETF (NYSEArca: DVYA ) are the two iShares ETFs that will participate in the program, which is “designed to incentivize Market Makers to undertake Lead Market Maker (“LMM”) assignment in exchange-traded products (“ETPs”) listed on NYSE Arca,” according to a statement issued by BlackRock: While the impact of participation in the NYSE Arca ETP Incentive Program, which is optional, cannot be fully understood until objective observations can be made in the context of the NYSE Arca ETP Incentive Program, potential impacts on the market quality of HYGH and DVYA may result, including with respect to the average spread and average quoted size for HYGH and DVYA. HYGH, which debuted in May and now has almost $47 million in assets under management, tries to reflect the performance of the Citi High Yield (Treasury Rate-Hedged) Index, which tracks a basket of high-yield bonds with a built-in hedge against rising interest rates. The fund tracks bond securities issued from the U.S. or Canada with at least one year remaining to maturity. The ETF has an effective duration of 0.36 years and a 30-day SEC yield of 5.67%. DVYA, which will celebrate its third anniversary in February, has almost $55 million in assets. The ETF has a trailing 12-month dividend yield of 6.29%. Australia accounts for 48% of DVYA’s weight while Hong Kong and Singapore combine for another 31%. According to the statement: As a participant in the NYSE Arca ETP Incentive Program, BlackRock will continue to pay the applicable NYSE Arca Listing and Annual fees in addition to an Option Incentive Fee, which would range from $10,000 to $40,000 per year and will in turn be paid by NYSE Arca to the LMM assigned to HYGH and DVYA. iShares Asia/Pacific Dividend ETF (click to enlarge) ETF Trends editorial team contributed to this post.