John Wasik

CHICAGO, April 20 (Reuters) – By now you’re probably seasick
of hearing about the 100th anniversary of the Titanic tragedy
and the myriad analyses of why it sunk and what it means. Yet
for some of us who felt compelled to see the James Cameron movie
again – and got suckered into paying for a disappointing 3D -
we’re still looking for metaphors and analogies.

Few Titanic buffs look at how J.P. Morgan, the principal
investor in the Titanic, fared after the disaster in 1912.
Morgan was a financial emperor at the time, controlling the
Titanic’s parent company, White Star Line, as part of an attempt
to monopolize North Atlantic shipping through a trust of other
shippers he owned.

Morgan set up the White Star Line as a British-crewed
company to side-step U.S. antitrust laws. The banker, who had
canceled his trip aboard the Titanic, died in 1913. (It was said
that the ship was doomed by the ghosts of the eight Irish men
who died building it, according to my wife, who grew up a few
blocks away from where the ship was built in Belfast).

What later submerged Morgan’s shipping trust was that it was
over leveraged as it tried to control an already volatile
business that took a huge hit when World War One started in
1914. Ultimately, Morgan’s monopoly attempt failed, and his
International Mercantile Marine Co went into receivership a few
years after the Titanic sank. Like most other attempts to corner
a commodity or industry, it was an “all in” bet that
over-concentrated risk. It was the equivalent of borrowing money
to invest your entire portfolio in dot-com stocks in 1999.

Managers of the reorganized International Mercantile, which
became United States Lines during World War Two, though,
apparently hadn’t learned the lesson of spending big on mammoth
ships or outdated technologies. The company built and launched
the SS United States in 1952, the largest passenger ship built
in the United States at the time, just before the airline
industry was starting its long run to dominate long-distance
travel.

It’s more instructive to look at two of the survivors of
Morgan’s legacy, namely General Electric Co and U.S.
Steel Corp. Both companies were consolidations of smaller
companies, employed huge economies of scale and are still very
much in business after more than a century. What kept these
goliaths in business over the years? Adapting to changing
markets, technologies and diversifying their sources of income.

U.S. Steel began its life in 1901 as the largest business
enterprise ever created. General Electric was a merger of Thomas
Edison’s holdings and another company. Neither corporation made
sexy products like tablet computers or smartphones. What makes
them survivors is that they produce things that are
indispensable in modern life. Steel is a global commodity in
ever-greater demand. Electrical equipment such as transformers
and generators are still needed to make power, which is needed
in every mature and developing country.

Even though these companies have weathered intense storms
over the years, a basic rule of corporate survivorship is to
make something or provide a service that’s a virtual staple,
improve your process over time, generate cash and hold onto
dearly to market share.

Some of the least-glamorous companies, surprisingly, have
also been around for a century or more: Colgate-Palmolive,
Procter & Gamble and Church & Dwight. Who would
have ever thought that you could consistently make money
initially only producing toothpaste, consumer staples and baking
soda?

What also binds these old-timers together is the fact
they’ve been paying dividends for more than a century. They’ve
enriched shareholders and grown dividend payments over the
years. Want to find more boring companies like this? Consider
the Vanguard Dividend Appreciation ETF or the PowerShares
Dividend Achievers Portfolio.

Often the best way to avoid financial icebergs is to be
hedge disasters, don’t increase your vulnerability to them. Be
aware that markets will forever be volatile. Don’t over-invest
in one stock, industry or country. If you have most of your
wealth in your employer’s stock, that’s one huge iceberg. The
worst events are those you can’t see coming, although you can
always prepare for them.

CHICAGO, April 16 (Reuters) – Got travel or mountain
climbing on your bucket list? How about taking up the guitar? If
you really want to live life to the fullest in your remaining
days, then what you should also add to those goals is a list of
your investment priorities and adjusting your risk accordingly.

This idea doesn’t come from a cheesy Hollywood movie, but
rather from the study of behavioral portfolio theory put forward
by Nobel Prize-winner Harry Markowitz and leading behavioral
economics expert and finance professor and author Meir Statman
(). They theorize that if investors
divide their portfolios into mental account layers measured by
risk, they can counter nervous investment errors.

This is how it works: let’s say you have a $1 million
portfolio. You can divide it up into different-sized buckets
with goals for items like college savings and retirement. For
example:

* The largest bucket, or sub-account, would be for
retirement. Assume that about $800,000 is in this bucket for an
event that’s 15 years away. Ultimately, you would like to build
this to $2 million.

* Saving for college? Earmark $150,000 for a goal that’s
three years away, eventually totaling $180,000 when your student
matriculates.

* Want to fund a bequest for your alma mater or your
favorite charity? Put aside $50,000 for a goal that’s 25 years
away.

If all of these goals were equal – and they are not – you
might leave them in one portfolio. However, you want to take
much less risk with the college fund than with the bequest goal
that is 25 years away.

By marking each bucket high, low or medium risk, you’ve
identified some prospective allocations in this behavioral
approach. In this case, risk is roughly equivalent to the time
you have to save for each goal. The shorter the time horizon,
the lower the risk you can assign to the bucket.

The short-term bucket should be invested mostly in bonds or
cash equivalents in which you cannot lose principal. This is
your most secure bucket and it’s for goals such as saving for a
down payment on a home or a car, or to set aside money for a
known expenditure like property taxes. Don’t expect much, if
any, return on these funds. Federally-insured money-market
accounts, Treasury bills and certificates of deposit are
probably the safest assets.

The medium-term bucket can be for major emergency expenses
such as unemployment and out-of-pocket medical expenses. I keep
that money in a short-maturity bond fund. It’s not
principal-protected, but it pays a somewhat higher return than a
money-market fund.

A medium-term bucket is also a good place for college
savings. For the biggest chunk of college funds for my two
daughters, for example, I have money set aside in automatically
age-adjusted 529 savings plans. As they get older, the fund
company shifts more money from stocks into bonds. I like this
approach because the accounts are rebalanced every year, so I
don’t fret about market risk. All I worry about is putting
enough money in to cover soaring education bills.

Your longer-term goals can be weighted more heavily toward
stocks and alternative vehicles. Again, you can choose an
automatic approach through a target-date maturity fund that
ratchets down stock-market risk as you age, balance your own
portfolio of low-cost exchange-traded funds or hire a fiduciary
adviser to select passive funds for you (the most expensive
route).

As you create your bucket list, don’t get tripped up by
things like projected or “desired” returns. Guess on the
conservative side – less than 4 percent for bonds and 6 percent
for stocks.

It’s also important not to try to overthink your decisions.
Be flexible and try different scenarios. Use allocation engines
to guide you through determining a comfortable portfolio mix.
For some good calculators, see websites like those of Yahoo
Finance, TIAA-CREF or T. Rowe Price.

Any comprehensive financial planner who works on a fee-only
basis (no commissions) will be able to fine-tune your strategy
if your needs are complex. Brokers and insurance agents should
be avoided.

If you do this right, you’ll be able to see a range of
investing possibilities that you may not see today. There is no
one right way to go about this, but if it is done with care, you
can avoid a leaky investing bucket.

CHICAGO, April 13 (Reuters) – The rain in Spain will only
cause you pain. So goes the latest worry about Spain’s current
financial woes for international investors. Yet that may not be
the case if you’re truly a global investor and look at the
larger picture in the United States and abroad.

I’m not discounting that Spain’s banks and bonds won’t be
pummeled more as the country limps through the aftermath of a
housing bust and deleveraging. It’s still a good idea to stay
away from big Spanish banks such as Santander or BBVA
and funds that hold Spanish-based and other
beleaguered euro zone companies and bonds.

Spain once looked like the toreador of Europe with robust
housing, financial and export growth. When I was last there in
2007, cranes dominated the skyline of Madrid, the heart of the
old city was being spruced up and a new high-speed rail system
linked major cities. The country appeared confident and buoyant.

Now the ghosts of housing developments and struggling banks
haunt Spanish streets, which are full of protesters decrying
austerity measures. As an investor, it will be hard to avert
your eyes from this tragedy – it will continue to roil global
markets – but you can find better economic news elsewhere.

But just because the PIIGS countries (Portugal, Ireland,
Italy, Greece and Spain) will continue to suffer doesn’t mean
you should abandon stocks in general. Unless a global recession
surfaces or the European angst crosses the Atlantic, U.S. and
emerging markets are promising long-term investments.

Some international market tensions were eased recently when
an Italian bond auction went better than expected and Chinese
growth expectations appeared to top estimates. I’m normally not
terribly optimistic, but signs of recovery also continue to help
U.S. markets.

Another drip of potentially positive news for world stock
markets is that oil prices could be easing. Iran has agreed to
renew talks with the permanent members of the United Nations
Security Council: the United States, Russia, China, Britain and
France.

The United States and other Western powers have been alarmed
over Iran’s stated development of nuclear weapons and threats to
close the vital Straits of Hormuz, a major channel for oil
supertankers. If Iran stays engaged, it could take even more
pressure off of petroleum prices.

Lower energy prices generally help stocks in all
energy-consuming countries, particularly those nations that need
to import most of their oil and gas.

For emerging stock markets, consider the Vanguard Emerging
Markets Index Fund, which gives you a sampling of more
than 900 stocks from countries such as China, Brazil, Korea and
Taiwan. The iShares Dow Jones US Index Fund offers broad
coverage of U.S.-based stocks.

Also don’t forget to offset the risk of owning stocks by
owning income-oriented investments. The Vanguard Total Bond
Market ETF owns a large piece of the U.S. bond market.
The T. Rowe Price Emerging Markets Bond Fund samples
developing countries. The SPDR Dow Jones Global Real Estate fund
holds real estate investment trusts from all over the
world.

All of which brings us to a classic cognitive dilemma: Our
brains can’t process all of this information about world markets
and make spot decisions on winners and losers. So don’t trip
over your feet when watching the headlines. Invest in every
asset category and adjust for the kind of risk you can afford to
take. Set your own goals and stick to them. It’s also better to
tango with a partner you know.

CHICAGO (Reuters) – During the financial market turbulence of recent years, fund marketers have launched a number of stock funds that boasted exceptionally low volatility. They were the equivalent of sea-sickness pills for those who still wanted to go on stock-market cruises.

Yet these exchange-traded funds (ETFs) make less sense when the stock market is bullish. You may sacrifice returns and could dampen volatility more effectively with other strategies. In a sustained bull market – if you want to be invested in stocks at all – you would be much better off in a broad-based, all-in index fund than a low-volatility ETF.

To be sure, as risk-reduction vehicles, low-volatility ETFs play it safer by investing in mature companies with steady cash flows and solid dividends. They are less likely to be sold off in a market rout such as the one experienced last year.

For example, ETFs such as the PowerShares S&P 500 Low-Volatility Portfolio focus on long-established dividend payers in consumer products and utilities. Their overall approach is to lower the risk in stock market investing by lowering the volatility.

LAGGING THIS YEAR

This strategy may have softened the swells from the stormy markets of last year, but it’s coming up a laggard this year as a recovering economy is propelling the general market.

According to the Leuthold Group, “during periods of buoyant equity returns, the strategy fails to perform as intended.”

How much does the low-volatility approach fall behind during up markets? About 4.0 percent on average, Leuthold reported.

Indeed, despite a strong showing overall for stocks in the first quarter – the Standard & Poor’s 500 index was up almost 12 percent in total return year-to-date through April 5 – even one of the best-performing low-volatility ETFs – the EGShares Low Volatility Emerging Markets Dividend fund – rose only 10.4 percent.

That return trailed the broad-based Vanguard Total Stock Market Index ETF by almost three percentage points year-to-date through March 31, according to an analysis prepared by Lipper, which is owned by Thomson Reuters.

That’s not to say you should throw the baby out with the bathwater. Leuthold also found that “during periods of increased market uncertainty” as defined by the CBOE Volatility Index (VIX) being up at least two points, low-volatility stocks outperform an average 6.48 percent from 1990 through 2011. The funds in the Lipper sample also had volatility measures as much as a point lower than the whole market.

Dividends have always been a bulwark when the market commences a selling frenzy of high-flyers in technology and non-essential businesses. The low-volatility companies will protect you somewhat against “deteriorating equity market sentiment and normal to negative equity market returns,” according to Leuthold.

If you want a low-volatility portfolio in general, concentrate on companies that have long track records of dividend growth in boring businesses such as consumer staples and electrical power generation. Think corn flakes and power plants.

WORTHY CONSIDERATIONS

Worthy considerations in the low-volatility camp include the Russell 2000 Low Volatility fund, which focuses on smaller companies and the iShares MSCI Emerging Markets Minimum Volatility Index fund, which holds companies from developing countries.

If you want to remain in U.S. stocks for the long haul, consider a low-cost, total market index fund such as the Fidelity Spartan Total Market Index Fund. At an annual expense ratio of 0.10 percent, managers give you a sampling of most of the U.S. stock market.

Still, a much more comprehensive approach to market risk should be on your radar screen. If you want a buffer against U.S. stocks, consider real estate investment trusts, bonds and commodities. And if you own single companies – such as your employer’s – hedge that risk by either reducing your stake or buying put options on those shares, which will pay you when they decline in value.

No matter what you or pundits think stocks will do this year, the market will always be volatile and you will be at risk for losing money if you’re invested in it. You’ll need to regularly ask yourself how much money you can afford to lose – and adjust your portfolio accordingly. There’s no sin if you don’t want or need to be in stocks now, so it may make more sense to shift more assets into bonds or cash.

Disclosure: I don’t own any of these funds.

(The author is a Reuters columnist. The opinions expressed are his own.)

(John Wasik; Editing by Chelsea Emery and Linda Stern)

CHICAGO, April 9 (Reuters) – During the financial market
turbulence of recent years, fund marketers have launched a
number of stock funds that boasted exceptionally low volatility.
They were the equivalent of sea-sickness pills for those who
still wanted to go on stock-market cruises.

Yet these exchange-traded funds (ETFs) make less sense when
the stock market is bullish. You may sacrifice returns and could
dampen volatility more effectively with other strategies. In a
sustained bull market – if you want to be invested in stocks at
all – you would be much better off in a broad-based, all-in
index fund than a low-volatility ETF.

To be sure, as risk-reduction vehicles, low-volatility ETFs
play it safer by investing in mature companies with steady cash
flows and solid dividends. They are less likely to be sold off
in a market rout such as the one experienced last year.

For example, ETFs such as the PowerShares S&P 500
Low-Volatility Portfolio focus on long-established
dividend payers in consumer products and utilities. Their
overall approach is to lower the risk in stock market investing
by lowering the volatility.

LAGGING THIS YEAR

This strategy may have softened the swells from the stormy
markets of last year, but it’s coming up a laggard this year as
a recovering economy is propelling the general market.

According to the Leuthold Group, “during periods of buoyant
equity returns, the strategy fails to perform
as intended.”

How much does the low-volatility approach fall behind during
up markets? About 4.0 percent on average, Leuthold reported.

Indeed, despite a strong showing overall for stocks in the
first quarter – the Standard & Poor’s 500 index was up almost 12
percent in total return year-to-date through April 5 – even one
of the best-performing low-volatility ETFs – the EGShares Low
Volatility Emerging Markets Dividend fund – rose only
10.4 percent.

That return trailed the broad-based Vanguard Total Stock
Market Index ETF by almost three percentage points
year-to-date through March 31, according to an analysis prepared
by Lipper, which is owned by Thomson Reuters.

That’s not to say you should throw the baby out with the
bathwater. Leuthold also found that “during periods of increased
market uncertainty” as defined by the CBOE Volatility Index
(VIX) being up at least two points, low-volatility stocks
outperform an average 6.48 percent from 1990 through 2011. The
funds in the Lipper sample also had volatility measures as much
as a point lower than the whole market.

Dividends have always been a bulwark when the market
commences a selling frenzy of high-flyers in technology and
non-essential businesses. The low-volatility companies will
protect you somewhat against “deteriorating equity market
sentiment and normal to negative equity market returns,”
according to Leuthold.

If you want a low-volatility portfolio in general,
concentrate on companies that have long track records of
dividend growth in boring businesses such as consumer staples
and electrical power generation. Think corn flakes and power
plants.

WORTHY CONSIDERATIONS

Worthy considerations in the low-volatility camp include the
Russell 2000 Low Volatility fund, which focuses on
smaller companies and the iShares MSCI Emerging Markets Minimum
Volatility Index fund, which holds companies from
developing countries.

If you want to remain in U.S. stocks for the long haul,
consider a low-cost, total market index fund such as the
Fidelity Spartan Total Market Index Fund. At an annual
expense ratio of 0.10 percent, managers give you a sampling of
most of the U.S. stock market.

Still, a much more comprehensive approach to market risk
should be on your radar screen. If you want a buffer against
U.S. stocks, consider real estate investment trusts, bonds and
commodities. And if you own single companies – such as your
employer’s – hedge that risk by either reducing your stake or
buying put options on those shares, which will pay you when they
decline in value.

No matter what you or pundits think stocks will do this
year, the market will always be volatile and you will be at risk
for losing money if you’re invested in it. You’ll need to
regularly ask yourself how much money you can afford to lose -
and adjust your portfolio accordingly. There’s no sin if you
don’t want or need to be in stocks now, so it may make more
sense to shift more assets into bonds or cash.

Disclosure: I don’t own any of these funds.

CHICAGO (Reuters) – To some, spring means cleaning, renewal and yard work. For nervous Nellies like me who still see the ghost rider of 2008 in my rear-view mirror despite the market being up sharply so far in 2012, it means rebalancing my portfolio.

There’s nothing sexy about rebalancing. You simply plod through your account statements and reorient your nest egg toward your objectives while lowering risk. The crux is that if you do it right, you are purchasing less-favored assets and selling higher-valued securities. In other words, you are buying low and selling high, which is what most investors consistently fail to do. Far too many folks buy on the way up and hope that good times will continue indefinitely, thus ignoring the downside risk.

If you don’t rebalance, your portfolio gradually becomes dominated by higher-risk and potentially over-valued assets. When the eventual correction or crash comes along, the resulting fall is much steeper – if you haven’t rebalanced.

I took a peek at my portfolio recently, and due to the bull run of late, I noticed that stocks comprised almost 58 percent of our joint 401(k) and individual retirement account holdings. Since my wife and I resolved that we’d never let stocks comprise more than half of our portfolio, we’ll have to make some adjustments. We still haven’t completely recovered from the train wreck known as the 2008 meltdown. As you can imagine, we’re more cautious these days.

For my family’s portfolio, based on my age of 54, I like to invest at least half in fixed-income. As a rule of thumb, your age should roughly match your target fixed-income allocation, if you’re a moderate to conservative investor.

According to a study by the Vanguard Group, “if a portfolio is never rebalanced, it tends to drift from its target asset allocation as the weight of higher-return higher-risk assets increases.” (for the full study see link.reuters.com/meg57s)

In terms of reducing overall portfolio risk, Vanguard researchers found that while portfolios that were never rebalanced had an average annualized return of 9 percent from 1929 through 2009 – versus 8.5 percent for balanced portfolios– the standard deviation (a volatility gauge) was a full 2 percentage points lower if rebalancing was done monthly. That was for a portfolio of 60 percent stocks and 40 percent bonds.

For most investors, though, rebalancing is like taking the whipped cream off a pie before you eat it. Unless you’re in automatically rebalanced target-date or age-adjusted college savings portfolios, you’ll have to make an extra effort to put it in motion.

In my own case, my wife and I will work with our mutual fund company (Vanguard), which provides a financial planner who can walk us through rebalancing as part of our service plan. We’ll have to sell some shares of our stock funds to purchase stakes in our bond-index and treasury-inflation protected securities funds.

Most larger mutual fund companies and some brokerage houses provide auto-rebalancing, although it can get complicated outside of tax-deferred retirement accounts. Most competent registered investment advisers and certified financial planners provide this service and give you big picture advice on portfolio allocations customized to your financial goals.

Do you have a 401(k) with your employer? Ask them if they provide automatic rebalancing and set it up if they do. According to David Wray, executive director of the Plan Sponsor Council of America, a group representing employer retirement plan providers, while he’s not sure how many employers provide this service, “virtually all” third parties who administer the plan platforms are set up for auto-rebalancing.

But don’t expect your co-workers to be talking up rebalancing at the water cooler. By another estimate, while more than half of employers offer auto-rebalancing, only 7 percent of employees use the service, according to Aon Hewitt, the benefits consultant, which polled employers last year.

Keep in mind that in taxable accounts, securities sales can trigger taxable capital gains. To simplify matters, you can choose to channel dividends and gains into a money-market account, where the funds can be used to buy shares during the rebalancing cycle.

You can set up your auto-rebalancing by date or asset level indicators – or both. Say you don’t want stocks to be more than 60 percent of your portfolio or you just want to do auto-rebalancing twice a year. That’s easily doable if your broker, employer or fund manager has this service.

At the very least, be honest with yourself and determine how much exposure you want to the stock market. Rebalancing may be a difficult and awkward discipline at first, but for the modest sacrifice you’d make in performance, you’ll probably be able to sleep better at night.

(At the time of publication, Reuters columnist John Wasik has a mutual interest in Vanguard Group and is an investor in Vanguard funds.)

(The author is a Reuters columnist. The opinions expressed are his own.)

(Editing by Beth Pinsker Gladstone and Andrew Hay)

CHICAGO, April 5 (Reuters) – To some, spring means cleaning,
renewal and yard work. For nervous Nellies like me who still see
the ghost rider of 2008 in my rear-view mirror despite the
market being up sharply so far in 2012, it means rebalancing my
portfolio.

There’s nothing sexy about rebalancing. You simply plod
through your account statements and reorient your nest egg
toward your objectives while lowering risk. The crux is that if
you do it right, you are purchasing less-favored assets and
selling higher-valued securities. In other words, you are buying
low and selling high, which is what most investors consistently
fail to do. Far too many folks buy on the way up and hope that
good times will continue indefinitely, thus ignoring the
downside risk.

If you don’t rebalance, your portfolio gradually becomes
dominated by higher-risk and potentially over-valued assets.
When the eventual correction or crash comes along, the resulting
fall is much steeper – if you haven’t rebalanced.

I took a peek at my portfolio recently, and due to the bull
run of late, I noticed that stocks comprised almost 58 percent
of our joint 401(k) and individual retirement account holdings.
Since my wife and I resolved that we’d never let stocks comprise
more than half of our portfolio, we’ll have to make some
adjustments. We still haven’t completely recovered from the
train wreck known as the 2008 meltdown. As you can imagine,
we’re more cautious these days.

For my family’s portfolio, based on my age of 54, I like to
invest at least half in fixed-income. As a rule of thumb, your
age should roughly match your target fixed-income allocation, if
you’re a moderate to conservative investor.

According to a study by the Vanguard Group, “if a portfolio
is never rebalanced, it tends to drift from its target asset
allocation as the weight of higher-return higher-risk assets
increases.” (for the full study see)

In terms of reducing overall portfolio risk, Vanguard
researchers found that while portfolios that were never
rebalanced had an average annualized return of 9 percent from
1929 through 2009 – versus 8.5 percent for balanced portfolios–
the standard deviation (a volatility gauge) was a full 2
percentage points lower if rebalancing was done monthly. That
was for a portfolio of 60 percent stocks and 40 percent bonds.

For most investors, though, rebalancing is like taking the
whipped cream off a pie before you eat it. Unless you’re in
automatically rebalanced target-date or age-adjusted college
savings portfolios, you’ll have to make an extra effort to put
it in motion.

In my own case, my wife and I will work with our mutual fund
company (Vanguard), which provides a financial planner who can
walk us through rebalancing as part of our service plan. We’ll
have to sell some shares of our stock funds to purchase stakes
in our bond-index and treasury-inflation protected securities
funds.

Most larger mutual fund companies and some brokerage houses
provide auto-rebalancing, although it can get complicated
outside of tax-deferred retirement accounts. Most competent
registered investment advisers and certified financial planners
provide this service and give you big picture advice on
portfolio allocations customized to your financial goals.

Do you have a 401(k) with your employer? Ask them if they
provide automatic rebalancing and set it up if they do.
According to David Wray, executive director of the Plan Sponsor
Council of America, a group representing employer retirement
plan providers, while he’s not sure how many employers provide
this service, “virtually all” third parties who administer the
plan platforms are set up for auto-rebalancing.

But don’t expect your co-workers to be talking up
rebalancing at the water cooler. By another estimate, while more
than half of employers offer auto-rebalancing, only 7 percent of
employees use the service, according to Aon Hewitt, the benefits
consultant, which polled employers last year.

Keep in mind that in taxable accounts, securities sales can
trigger taxable capital gains. To simplify matters, you can
choose to channel dividends and gains into a money-market
account, where the funds can be used to buy shares during the
rebalancing cycle.

You can set up your auto-rebalancing by date or asset level
indicators – or both. Say you don’t want stocks to be more than
60 percent of your portfolio or you just want to do
auto-rebalancing twice a year. That’s easily doable if your
broker, employer or fund manager has this service.

At the very least, be honest with yourself and determine how
much exposure you want to the stock market. Rebalancing may be a
difficult and awkward discipline at first, but for the modest
sacrifice you’d make in performance, you’ll probably be able to
sleep better at night.

CHICAGO (Reuters) – Want to vote with your dollars when it comes to environmental concerns? One way is to invest in environmentally focused mutual and exchange-traded funds, although you may be trading your green conscience for increased portfolio risk.

People who are concerned about energy prices and climate change have put more than $3 trillion into the hands of managers who target positive environmental, social and corporate governance practices, encompassing more than 250 investment funds, according to the Forum for Sustainable and Responsible Investment’s 2010 report on socially responsible investing.

Like any sector, environmental stocks are volatile. One year ethanol producers are hot, then sold off. Solar-panel manufacturers sizzle – and then fade.

I’ve found that green funds tend to overweight a particular sub-sector. Some managers may focus on water infrastructure, while others may hold a broader array of geothermal, biomass, solar, wind and energy-efficiency stocks.

When considering actively managed funds, you always encounter higher sector risk; managers can guess wrong on which will be the next hot industry.

NOT IMMUNE

Green funds were not immune to the travails of the market meltdown in 2008. They were sold off with the broader market and closely track it. If you take a look at the performance chart of a green fund such as the Market Vectors Environmental Services ETF, you can see it parallels the S&P 500 Index. When the index tumbled in late 2008, the Market Vectors fund followed, although slightly outperforming it over the past five years.

And, of course, in the real world, no one company is entirely clean and green, although these specialized managers attempt to find companies focused on sustainability and solutions to the global problems of resource depletion, energy consumption, pollution and climate change.

All of this is not to say that you can’t do well in a green fund. Along with the rest of the stock market, their returns have blossomed recently. The Winslow Green Growth Fund is up about 13 percent year to date through March 30. The Fidelity Select Environmental and Alternative Energy fund has risen about 9 percent.

One of the biggest issues with green funds is that they haven’t been around very long, so most of them don’t have track records that run through several bear markets. Only a handful have been around for more than 10 years.

GREEN PICK

Ultimately, though, if you want the broadest-possible exposure to green investing, you’ll need an index fund that covers much more ground and doesn’t specialize in environmental companies. The Vanguard Total Market Index ETF samples more than 3,000 stocks, so your chance of owning the next Microsoft of green technology is more likely to be from holding that portfolio.

Costs are also much lower in the bigger index funds. The Vanguard fund, for example, has a 0.07 percent annual expense ratio for management fees. The Winslow fund, in comparison, charges 1.45 percent.

Even though there may be more losers than winners, green companies may be golden over the long term. Energy and resource issues are only going to get more challenging as more people crowd the planet and demand more water, electricity, fertilizer, oil, coal, metals and consumer goods.

Yet don’t amplify the risk profile of your portfolio en route to doing the right thing. There are many more sensible ways to help the planet.

(The author is a Reuters columnist. The opinions expressed are his own.)

(John Wasik; Editing by Beth Pinsker Gladstone and Andrew Hay)

CHICAGO, April 2 (Reuters) – Want to vote with your dollars
when it comes to environmental concerns? One way is to invest in
environmentally focused mutual and exchange-traded funds,
although you may be trading your green conscience for increased
portfolio risk.

People who are concerned about energy prices and climate
change have put more than $3 trillion into the hands of managers
who target positive environmental, social and corporate
governance practices, encompassing more than 250 investment
funds, according to the Forum for Sustainable and Responsible
Investment’s 2010 report on socially responsible investing.

Like any sector, environmental stocks are volatile. One year
ethanol producers are hot, then sold off. Solar-panel
manufacturers sizzle – and then fade.

I’ve found that green funds tend to overweight a particular
sub-sector. Some managers may focus on water infrastructure,
while others may hold a broader array of geothermal, biomass,
solar, wind and energy-efficiency stocks.

When considering actively managed funds, you always
encounter higher sector risk; managers can guess wrong on which
will be the next hot industry.

NOT IMMUNE

Green funds were not immune to the travails of the market
meltdown in 2008. They were sold off with the broader market and
closely track it. If you take a look at the performance chart of
a green fund such as the Market Vectors Environmental Services
ETF, you can see it parallels the S&P 500 Index. When the
index tumbled in late 2008, the Market Vectors fund followed,
although slightly outperforming it over the past five years.

And, of course, in the real world, no one company is
entirely clean and green, although these specialized managers
attempt to find companies focused on sustainability and
solutions to the global problems of resource depletion, energy
consumption, pollution and climate change.

All of this is not to say that you can’t do well in a green
fund. Along with the rest of the stock market, their returns
have blossomed recently. The Winslow Green Growth Fund
is up about 13 percent year to date through March 30. The
Fidelity Select Environmental and Alternative Energy fund
has risen about 9 percent.

One of the biggest issues with green funds is that they
haven’t been around very long, so most of them don’t have track
records that run through several bear markets. Only a handful
have been around for more than 10 years.

GREEN PICK

Ultimately, though, if you want the broadest-possible
exposure to green investing, you’ll need an index fund that
covers much more ground and doesn’t specialize in environmental
companies. The Vanguard Total Market Index ETF samples
more than 3,000 stocks, so your chance of owning the next
Microsoft of green technology is more likely to be from holding
that portfolio.

Costs are also much lower in the bigger index funds. The
Vanguard fund, for example, has a 0.07 percent annual expense
ratio for management fees. The Winslow fund, in comparison,
charges 1.45 percent.

Even though there may be more losers than winners, green
companies may be golden over the long term. Energy and resource
issues are only going to get more challenging as more people
crowd the planet and demand more water, electricity, fertilizer,
oil, coal, metals and consumer goods.

Yet don’t amplify the risk profile of your portfolio en
route to doing the right thing. There are many more sensible
ways to help the planet.

CHICAGO (Reuters) – Having been a stock market investor during the worst downturns over the past quarter century, I’m naturally cautious about national economic shocks like recessions, inflation, bubbles and wars.

None of those threats have disappeared from my radar screen. But being a squeamish investor, as I’m watching the steady ascent of the U.S. stock market this year, I have one question: What should you be most afraid of?

I share the caution espoused by former Treasury Secretary Robert Rubin, whom I heard speak at the Chicago Council on Global Affairs on Thursday. “I’m an investor – a troubled investor – with a very deep concern,” Rubin said. “If we (the U.S.) don’t get on a sound fiscal trajectory, there will be a severe crisis in the bond and currency markets.”

I also share Rubin’s other concern that markets could be tripped up by a European debt default. That seems less likely with the passage of time, although it’s certainly on the table. Even though I have issues with Rubin’s role in overseeing disastrous financial deregulation in the 1990s, he’s still a keen observer of markets.

MORE CONCERNS LOOM

Will there be another U.S. debt-ceiling brouhaha? We have about eight months before that might happen, and it could be another grotesque event for the markets. There’s also the threat of trouble with Iran leading to higher oil prices, although the stock market hasn’t quite reacted to that yet. What about the prospect that investors buying U.S. debt will demand higher interest rates because of the increasing perils of investing in an overleveraged country? That one is beginning to give me agita.

Maybe we got a warning shot across the bow recently when U.S. Treasury yields briefly shot up to 2.3 percent for the 10-year note last week from around 2 percent. Is this the beginning of the end for the great bond bull market that began in the 1980s as the economy heats up or foreign investors demand greater returns on Treasuries?

The sanguine view is that a slight uptick in interest rates reflects improving economic news in employment, industrial production, household income and corporate profits. “We believe the current trend of rising yields signals an acknowledgement of growing optimism around the economy and, as such, is a positive for stocks,” wrote Bob Doll, chief equity strategist for BlackRock, in his weekly newsletter.

“As we have been saying for the past several weeks, it appears the U.S. economy is improving to the point that it is entering a self-sustaining cycle, helped in large part by advances in the labor market,” Doll added.

A slight uptick in interest rates is not worrisome – if it’s tied into the prospect of sustained economic growth. Rob Sharps, a growth-stock manager for T. Rowe Price, is even more optimistic: “Easier monetary policy outside the U.S. and improved domestic housing and labor markets should support stock market gains in 2012,” Sharps says.

Should you share this optimism about economic recovery, make sure that you’re not holding long-maturity bond funds, which will decline the most if interest rates rise. Buy Treasury inflation-protected bonds at treasurydirect.gov. Then take a look at how much you own in stocks. The percentage you hold in stocks should roughly match your age, which is a basic rule of thumb for risk reduction.

The best way of taking advantage of the growth-stock rally is through passive index funds like the Vanguard Growth Index Fund or the iShares S&P 500 Growth Index Fund.

For a more broad-based approach, don’t forget that small companies are also in on the rally. The iShares S&P Small Cap 600 Growth Index Fund or the Vanguard Small-Cap Growth Index Fund are worthy considerations. If your 401(k) doesn’t offer low-cost stock index funds, ask for them.

I yearn to be optimistic, yet you still have to be aggressively cautious because of the sum of all fears: the massive disruption of the 2008 meltdown won’t be sorted out for years and it will lead to a lingering malaise.

There is no short-term solution for that malarial economic malady, but you can easily focus on personal capital preservation in the interim.

(Editing by Lauren Young and Leslie Adler)