Disruptive Investing

Exchange traded funds (ETFs) are all the rage. They come large and small, long and short, ultra and supersized, and track just about any sector, geography, investing style or commodity you can think of. The great thing is they trade like stocks yet share some of the characteristics of mutual funds (without the massive overhead some mutual funds carry). ETFs are baskets of like stocks in a particular industry or region or index, and so, if you think for example high tech is going to take off, rather than study and research for which particular stocks to buy, jump on a high tech ETF and enjoy the benefits of spreading out your bet. You might not get as high a return as you could have with that one perfect stock pick, but then again, you have to be a really good stock picker while also bearing the risks of a less-diverse portfolio. Some say ETFs have lower overhead than mutual funds and perform just as well, because of the reduced fees. Some even say during down markets ETFs fair better t...

Risk is difficult to measure and to manage. ETFs and indexes exist that provide performance averages. Mutual funds suffer from overhead and management costs, loads and redemption fees. When investors are paying fund managers to reduce risk, minimize volatility and maximize returns, and they realize an industry average, index (which has no management), or T-Bill has bettered their fund, they should be upset. They have experienced an opportunity loss while taking on excessive risk, and while paying people to manage that risk. We could use a backward looking lense to hopefully get a projection of what future performance or risk-adjusted returns might be. But, people cannot make informed decisions because they cannot truly know past risk, present risk, and more importantly future risk. As the economy changes and as individual assets within a portfolio change, daily, one must have a means of contemplating different asset allocations based on reality and make necessary adjustments to maximiz...