3 Must-Have Assets for Any Winning Portfolio
One of the most important facets of portfolio construction is diversification. You need to have several kinds of assets in your portfolio because if one asset class loses a substantial amount of value, you will be protected from significant losses.
However, diversification goes beyond just holding stocks in different sectors. In what follows, I provide investors with three kinds of assets that they need to include in their portfolios in order to be properly diversified. While their function in a portfolio is specific, these recommendations are general enough so that as an individual investor you can customize them to suit your personal risk tolerance and your own outlook on the economy.
1. Foreign Assets
Many investors in the U.S. are U.S.-centric in their investing. We have better access to knowledge about U.S. companies as Americans, and we don’t have access to many foreign investments. However, there are a lot of excellent foreign investments. Many foreign stock markets are substantially cheaper than the S&P 500, and many of them also pay higher dividends. Furthermore, there are economies out there that have significant potential. For instance, many emerging economies have young, growing populations that are becoming more affluent and more productive as they get older.
Fortunately, we live in the age of ETFs and ADRs (American depository receipts), and these make it very easy to get access to funds holding several foreign stocks as well as individual foreign stocks. Investors have several options for gaining international stock exposure. For instance, a simple way to do so without taking on individual stock or country risk is to buy an ETF such as the Vanguard Total International Stock ETF (NASDAQ:VXUS). This fund is comprised of shares of the major companies traded throughout the world.
More aggressive investors –or those who have the time to investigate the benefits and detriments of investing in specific economies — have access to various individual country ETFs. For instance, one of the best performing stock markets this year is the Turkish Stock Market. Investors sold off Turkish shares last year in the wake of social unrest, and that created a great buying opportunity to invest in one of the world’s fastest growing economies at just 12 times earnings. Investors who are interested in Turkish stocks can conveniently buy the iShares Turkish ETF (NYSEARCA:TUR).