Are Index Funds Better in Volatile Markets?
Investors have been told that buying an entire index--such as the S&P 500--is better than owning a smaller number of stocks, since diversification across hundreds of securities lowers risk by lessening the volatility from individual stocks. But is it? Folio Investing answers this important question.
Vienna, VA (PRWEB) January 15, 2009 -- Investors have been told that buying an entire index--such as the S&P 500--is better than owning a smaller number of stocks, since diversification across hundreds of securities lowers risk by lessening the volatility from individual stocks.
Defensive Strategy Folio Results vs. S&P 500. Note: Three-month results as of January 9, 2009. The Defensive Strategy Folio has been in existence for less than one year.
But is it?
What investors may not realize is that there is an alternative to owning funds that invest in the entire market. That approach involves owning a smaller, but still intelligently diversified, portfolio of individual securities and, especially in turbulent times, investing in such a portfolio that is tailored to provide stability in highly volatile conditions. Compared to a fund, not only does such a portfolio provide benefits such as tax efficiency and customizable control over which securities are owned, but it can be specially designed to be lower in volatility - in other words, less risky.
Back in late February 2008, Folio Investing, the innovative online securities firm, described a strategy that might help investors deal with substantial market volatility without having to buy an entire index. Folio Investing launched an investment portfolio, called the Defensive Strategy Folio, to demonstrate this approach. Defensive stocks have historically been less volatile than the overall market and tend to do better than the broad market during market downturns, which could also provide a safe haven during periods of market instability.
Was it possible for a passive allocation of large cap stocks to dramatically out-perform the market in 2008?
Comprised of 17 individual stocks, the Defensive Strategy Folio has substantially out-performed the S&P 500 index since its inception. It has weathered the historic turbulence in the financial markets during 2008, thanks to its strategic selection of securities comprised of large-cap stocks in non-cyclical industries. These industries include health care, consumer goods, insurance and defense contractors, which have proved resilient (even if not immune) to significant market turbulence and declines, as they produce products and services that people always need.
The data: since late Feb. 2008, when the Defensive Strategy Folio was introduced, through 2008 year end, the S&P 500 was down 33.5%, but the Defensive Strategy Folio declined only 13.6%. And although the S&P 500 declined by 0.2% over the 3 month period, ending January 9, 2009, the Defensive Strategy Folio actually increased by 15.5% during that the same period.
The Defensive Strategy Folio is one of over 100 Ready-To-Go Folios offered by Folio Investing. These Folios combine some of the best features of mutual funds, ETFs, and individual stocks, and may be bought, sold, or customized in a single transaction.
"For investors seeking to maintain exposure to the growth potential of equities, while limiting portfolio risk, the type of approach used to design the Defensive Strategy Folio could provide a good solution." said FOLIOfn founder and CEO Steven Wallman. "While the companies represented in the portfolio may have less potential upside than riskier portfolios when the market turns around, they also should be less volatile in down markets as the evidence shows."
In light of the stock market's performance in 2008, it is reasonable for investors to explore alternatives to buying and holding funds such as S&P 500 Index funds.
Folio Investing hopes to play a constructive role in helping investors select or develop their own investment portfolios that are better suited to their needs. To learn more about the Defensive Strategy Folio or other investment portfolios available through Folio Investing, visit us online at www.folioinvesting.com.
About Folio Investing
FOLIOfn, Inc. was voted "Best of the Web for Alternative Investing" by Forbes.com. Its unique, patented Folio Investing offering enables investors to create their own folios--much like creating a personalized ETF or mutual fund. Folios can provide significant tax advantages, ability to customize, transparency and lower costs, while allowing for diversification. Investors can also choose from over 100 Ready-To-Go Folios, representing different market indices, sectors, geographic locations and asset classes. In addition, through the Folio Investing website, investors can purchase mutual funds and ETFs cost-effectively. The Folio Investing platform allows commission-free "window" trading for a low monthly fee, as well as dollar-based and fractional share investing. FOLIOfn also delivers innovative investment solutions to financial professionals and institutions through FOLIOfn Institutional (www.folioadvisor.com), a division of FOLIOfn Investments, Inc.
Folios can be managed or unmanaged and are offered by FOLIOfn Investments, Inc., a registered broker/dealer and are not registered investment companies. FOLIOfn Investments, Inc., is a member of FINRA/SIPC. For more information, please visit www.folioinvesting.com.
Disclaimer: While FOLIOfn Investments, Inc. provides brokerage offerings, tools and other means to help investors manage their investments and taxes, FOLIOfn Investments, Inc. does not provide investment, tax, or legal advice. Investors who wish to receive such advice should consult their investment, tax or legal advisers.
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