Grandfathers with a future
Diversification has proven to be, over time, the most successful investment strategy. For this purpose, the best tool that can someone use to achieve diversification is nowadays, ETFs.
What are ETFs
ETFs or Exchange Traded Funds are similar to mutual funds in that they track an index, commodities, currencies or a basket of securities but trade like a stock on an exchange like any ordinary share. They are similar to the shares of the old Greek Investment Trusts.
ETF’s have been embraced by investors of all categories, because they offer diversification, transparency and expertise. Although management is passive, portfolios of ETFs that are based on an index and guarantee that there will be no surprises which occasionally occur in some stocks.
Example
Speaking of security and safety, the NYSE Century Portfolio (Ticker: NYCC) is one of the most notable examples. NYCC follows an index designed to measure the performance of some of the largest and oldest businesses in the USA. In order for a company to join the index, it must be in business for at least 100 years, be traded on the Stock Market and have a market capitalization of at least US$1 billion.
It is obvious that this ETF seeks to bring together investors who foresee the stability of the US economy, by investing in companies which have been proven to survive through time. These companies provide a sense of safety, because they have survived two world wars, a deep recession, significant periods of growth, striking changes in business conditions and consumer habits. They all have the conditions to survive in the coming years, as difficult as they might be.
It offers to investors, targeted exposure to companies that have demonstrated their ability to innovate, to evolve and to thrive through various economic cycles, political conditions and social changes.
“PowerShares with the NYSE Century Portfolio, invests in popular and respectful brands that have defined the US economy for more than a century,” said Martin Flanagan, president and CEO of Invesco.
The ETF holds almost 400 companies, demonstrating that there are many enterprises that can last through time. Only 30% of their portfolio is in large capitalization stocks. There are quite a large number of trusts of medium and smaller size that have made it through time.
It is therefore not at all unlikely to see a very good combination of the high performance that we usually foresee in a small capitalization companies, with the added safety provided by a company that has withstood the tests of time. In 2013 the ETF outperformed the S&P 500.
We understand that the index covers a very wide range of industries and sectors. Naturally, technology and telecommunication companies occupy very small percentage of the portfolio, less than 5%.
Conclusion
It is a fact that any individual cannot properly manage a well-diversified portfolio. Many investors do not have the resources, the ability, the education and psychological makeup to do so. Others do have these qualities, but prefer not to do so. Availability of time usually being biggest reason.
ETFs are the ideal solution for those who wish to invest in shares expecting a satisfying performance, but choose a more passive role.
Each ETF has its own advantages and disadvantages, which investors should take into consideration before they choose. Caution is needed, as in all stock market securities. They have to be able to distinguish the best among hundreds.
Mainly, however, they have to recognize the right time. The Timing, when someone buys or sells, is the most crucial factor for succeeding in the stock investing.
The NYSE Century Portfolio has not been listed for many years. Therefore investors should be cautious since this strategy, although it sounds quite promising, has not been tested in practice.
* The analysis of the above ETF is given as an example for the investment options available in the U.S. stock market. Choosing the right company is only half way for success. The other half is the time period that we should positioning.
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