Rules of the Game: Match Portfolio With Financial Plan

 | Mar 25, 2013 | 10:00 AM EDT
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For the past couple of weeks, as I've recovered from some surgery, (everything is fine, and I'm recovering well!), I have had time to reflect a bit on market cycles, asset classes and investor attitudes.

I mostly took a break from financial media, opting to catch up with "Downton Abbey" and to read some books about plant-based diets. (It occurred to me this morning that misconceptions about the typical American, meat-based diet are not that different from many Americans' misconceptions about investing and trading -- but that's a story for another day.)

My early stock-market training consisted of a methodology for trading in and out of growth stocks, with technicals driving buy-and-sell decisions.

While I value that training, and continue to see merit in the inclusion of growth stocks in a portfolio, my perspective has shifted to a more holistic view of investments and financial planning. In other words, your portfolio has to match your financial plan. Blindly latching on to the hot growth stock of the day is not a plan, and it does not even remotely take into account the unique aspects of your own financial situation.

That's why I have begun recently to use frequent caveats about trade or investment ideas. While it's relatively easy to find sexy-looking ideas, that doesn't mean every idea is appropriate for every situation.

But I understand the wisdom in being informed about asset classes and particular investments that may be sound additions to your overall strategy. Therefore, I will be focusing on a few different ETFs and the reasons why they are included within some of our moderate client portfolios.

 I'll start with an interesting component, the WisdomTree Emerging Market Small Cap Fund (DGS). I say "interesting" because I have experience with small-cap trading (even hosting a small-cap radio show at one point), and the traditional appeal of small caps is their growth potential.

That's more true of U.S.-based small caps, however, than it is for emerging-market companies. The DGS offers a dividend yield of 2.9%, better than U.S.-focused small-cap funds such as the iShares Russell 2000 ETF (IWM), the iShares Core S&P Small-Cap ETF (IJR) and the Vanguard Small Cap ETF (VB).

In addition, we like the emerging-market exposure offered by this fund, given our belief that companies from these markets are likely to perform well in 2013. This is a situation in which the top holdings are unfamiliar to most U.S. investors. For example, the top holding is Chile-based Administradora de Fondos de Pe (PVD), a pension-fund operator that is available as a NYSE-listed ADR. It has a market cap just shy of $3 billion, but trades a paltry 12,800 shares in the U.S. -- testament to its low profile among investors here. With that type of thin trade, it's preferable to own the stock as part of an ETF, rather than as a separate portfolio holding.

Top countries represented are Taiwan, Thailand, South Korea, Malaysia, Brazil, Turkey, South Africa, China, Indonesia and Chile. Top sectors are financials, industrials, consumer discretionary, materials, information technology, consumer staples, utilities, energy, health care and telecom.

Be aware, I am just pointing out some attributes of this fund, and explaining why we are holding it at this time. As market conditions change, we may rotate out of it, or add to our position. In addition, this is absolutely not a holding for every client. Always remember that your portfolio must match your financial plan, not just be a reflection of what you or somebody else considers "hot" right now.

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