This month we are making several changes among our recommended investment vehicles as well as to the “weights” we assign to the asset classes we recommend for investors of various circumstances. These changes do not represent a significant departure from our approach.
They result from the emergence of new investment vehicles not previously available to individual investors as well as from refinements to our own empirical research. Investors who currently own one of our two recommended small cap value funds might consider the iShares Russell Micro-Cap Index Fund (Ticker: IWC, annual expense ratio 0.60%) as a means of extending their portfolio’s exposure to include the tiniest U.S. stocks. We discussed this exchange-traded fund in detail in the September 2005 INVESTMENT GUIDE but did not recommend it at that time since it had only recently begun trading. IWC “overlaps” some of the stocks held in the two small cap funds but it also provides exposure to stocks that these funds exclude; it includes a significant portion of the smallest 4 percent of the overall U.S. equity market that has, over time, provided the greatest returns (as well as the greatest volatility) among U.S. equities.
Investors who own the iShares S&P 350 Index (IVW) or the Vanguard European Index fund (VEURX) should consider liquidating these positions in favor of the iShares MSCI EAFE Fund (Ticker: EFA, annual expense ratio 0.35%) or the Vanguard Developed Markets Index Fund (Ticker: VDMIX, annual expense ratio 0.29%). This will provide exposure to international stock markets not just in Europe but also to developed markets throughout the world (primarily Pacific-rim nations). Investors willing to pursue higher risk and return might also include the iShares MSCI EAFE Value Index fund (Ticker: EFV, annual expense ratio 0.40%); research suggests that the so-called “value” effect, that is, the higher expected returns attributable to distressed large-cap stocks in the U.S., is also found among developed foreign markets.
We have replaced our “Recommended Portfolio Allocation Percentages” table with our “AIS Model Portfolios” table. Readers will find changes among the holdings assigned to each of our three baseline portfolios (conservative, moderate, and aggressive). These changes, which are based purely on a review of historical risk and return, are discussed in greater detail in the “Quarterly Review of Investment Policy” found within.
Also in This Issue:
Quarterly Review of Investment Policy
Government Sponsored Entities: Fannie Mae and Freddie Mac
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles
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