removing single stock exposure is the best way to avoid blow ups
exchange traded funds
Systemic risk affects the entire system of stocks or universe of risk assets. Unsystematic risk is the risk that a single stock carries or when added to a greater portfolio can also be considered concentration risk. Exchange Traded Funds remove this single point of risk exposure so that the impact from an Enron, WorldCom or Bear Stearns does not severely impact the portfolio. Diffusing the volatility exposure from a concentrated bet, or even a correlated sector bet like high growth technology or industrial commodities is the best way to achieve steady long term results. Is this glamorous? Maybe - maybe not, but as we all know true alpha or the excess returns attributed to an investment manager's decision is difficult to achieve in a consistent manner over the long run. In fact, most actively managed funds at best tend to revert to the market return at some point in time. So why pay the exorbitant fees for the eventual returns that will most probably just mirror the greater market at large?
The income stream from dividends expands the base of assets that compound the value of a portfolio over time but the drag on this compounding comes from fees. Fees will lower the base of assets that are needed for portfolio returns to compound and appreciate in value over time. By focusing on the lowest fee ETFs we can find, that fulfill our investment category requirement given our allocation assessment is key to allowing for appreciation and the compounding of 'interest' on 'interest' or in our case with ETFs: compounding the value of accumulated and increasing dividend payments.