Ten Rules for 2010

01/04/2010 12:20 pm EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Managing country risks and avoiding overexposure to companies are the keys to successful global investing, writes Carl Delfeld in Around the World With ChartwellETF.com.

1. Liquidity First
Before you even think of building an investment portfolio, you should set aside about six month of income in a "rainy day" money market fund. Having this money set aside will ease your mind and allow you to be more open and creative with your global portfolios.

2. Separate Portfolios
You should separate your core conservative portfolio from your growth portfolios. With the core conservative portfolio, your top priority is capital preservation. Your growth portfolios are more speculative with capital growth as the primary goal.

3. Think Global And Really Diversify Your Portfolios
You need positions in your portfolios that are likely to offset each other as unexpected events and market movements become a reality. Spread your risk and avoid having one ETF account for more than 5%-10% of your core portfolio.

4. Be Careful What Countries You Pick
You [shouldn’t have] too concentrated a position in a particular country or region. In particular, take a good look at the following: 1. the stability and overall political and corporate governance; 2. the legal environment, respect for contracts, low levels of corruption, due process, and rule of law; 3. the macroeconomic environment, including fiscal discipline and currency strength. Know what drives specific markets: Chile is dependent on copper prices, Austria is a banking play on Eastern Europe, Russia is highly focused on oil and natural gas and South Korea is increasingly integrated into China’s economy.

5. Look Forward, Act Now
The price or valuation of a country's stock market is also extremely important. Often the best time to buy into a country's stock market is when it is beaten down but there are signs that its economic and political problems will sharply improve. Timing and trends are key.

6. It’s the Politics
Political change cuts both ways and can present great investment opportunities. Most great bull markets begin with significant economic reform. In emerging markets, regulatory and political risk can swamp traditional portfolio analysis. Who can dispute that India’s election this spring ignited a tremendous rally or that the clear and commanding re-election of President Yudhoyono in Indonesia contributed mightily to the 100%-plus surge of its market in 2009.

7. Minimize Company Risk
Instead of trying to pick the best three stocks on the Tokyo Stock Exchange, why not just minimize company risk by buying the Japan iShare ETF (NYSEArca: EWJ) that tracks the Nikkei 225 and spread this risk amongst 225 Japanese companies? Or you could hedge your bets and do both. Japan has lagged in 2009, but if the Japanese yen weakens in 2010 (as I suspect), EWJ and the ProShares UltraShort Yen ETF (NYSEArca: YCS) will soar.

8. Monitor ETF Country and Company Exposure
Be careful to look under the hood of ETFs to see where your money is going. For example, let‘s look at the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). It invests in 23 different countries, so it is natural to think that you will get broad exposure to all 26 countries. [But] 50% of your investment in this fund is going to four countries: South Korea, Brazil, Taiwan, and China while only about 1% to Indonesia and Turkey. In addition, incredibly, 4.9% is going to one company, Samsung Electronics of South Korea.

9. Manage Risk and Cut Losses
Save yourself a lot of pain and agony by following a simple rule. If a position ever falls more than 8%-12% from its high, sell it immediately and reassess the situation. And if you invest in an ETF with a sizable downside risk, why not spend a few hundred dollars to purchase a put option as an insurance policy?

10. Consider Rebalancing and an Annual Portfolio Check-Up
At least annually, you need to make some changes so that you are not overly exposed to countries that have higher risk factors and volatility. One way is by selling some shares of your winners and increasing exposure to under performers. This accomplishes another goal—locking in gains and taking some money off the table. Remember, only a fool holds out for top dollar, especially in the more volatile emerging markets.

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