removing single stock exposure is the best way to avoid blow ups
exchange traded funds
Unsystematic
Systemic risk affects the entire system of stocks or universe of risk assets. Unsystematic risk is the risk associated with a single stock, which, when added to a larger portfolio, can also be considered concentration risk. Exchange Traded Funds (ETFs) mitigate this single point of risk exposure, so the impact of an Enron, WorldCom, or Bear Stearns does not severely affect the portfolio.
Reducing 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 approach glamorous? Maybe, maybe not. However, as we all know, true alpha—the excess returns attributed to an investment manager's decisions—is difficult to achieve consistently over the long run. In fact, most actively managed funds tend to revert to the market return at some point.
So why pay exorbitant fees for returns that will most likely just mirror the broader market?
Fees
The income stream from dividends expands the base of assets that compound the value of a portfolio over time. However, fees can hinder this compounding effect by lowering the base of assets needed for portfolio returns to grow and appreciate.
By focusing on the lowest-fee ETFs that meet our investment category requirements based on our allocation assessment, we can maximize appreciation and the compounding of 'interest on interest.' In the case of ETFs, this means compounding the value of accumulated and increasing dividend payments.
