Archive | November, 2010

The 50-Percent Solution

Investing can seem so complicated. Building a portfolio can involve dozens of decisions, each of which seems terribly important. Here are a few that readers have mulled over recently, according to emails I’ve received:

Should I use fundamentally weighted or traditional cap-weighted ETFs?
Should I hedge the currency in my US holdings?
Will dividend-focused equities outperform a broad-market ETF?
Short-term bonds or a broad-market bond fund?

All of these are thoughtful questions, but each involves a choice between two good alternatives: one is likely to turn out better over the long run, but there’s no way of knowing which one. And yet I regularly hear from readers who are sitting in cash—or worse, sitting in overpriced mutual funds—because they can’t decide which alternative to take.

There are lot of big questions in investing. Whether you use a stock-picking strategy or a passive Couch Potato portfolio matters a lot. Hiring an advisor or investing on your own will also make a dramatic difference. Dumping your GICs for high-yield bonds without understanding the risk? Definitely huge. Decisions like those above—where both alternatives are reasonable, and the superiority of one cannot be predicted—are much smaller.

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