ZF Capital

LIKE A WARM BATH or high thread-count sheets, nothing feels quite as comfortable as money in the bank. And with the major equity indexes down year-to-date, I’m surely not the only one who finds a sweet satisfaction in watching interest payments tumble in each month to a plain old money-market account. Cash (and cash equivalents like money-market accounts, certificates of deposit or Treasury bills) are often referred to as earning the “risk-free” rate for obvious reasons. Cash provides a predictable, but paltry, return. And while cash deserves a place in everyone’s portfolio, you can’t just hide in a money market all your life. There are other ways of dealing with risk besides hiding your money under the mattress. The name of the game is wealth creation: In order to make some money, you’ve got to make some moves.

And while it took a 68% drop in the Nasdaq to finally sink in, most investors are now realizing that the most effective way of reducing risk in their portfolio is by diversifying among various types of assets. Diversification lowers a portfolio’s volatility and can even enhance returns. And while index funds that track the S&P 500 give the illusion of diversification, because they are weighted by market capitalization they are essentially focused on large-cap stocks. Owning Cisco Systems (CSCO), Intel (INTC), General Electric (GE) and an index fund exposes you to as much diversity as a potluck dinner at David Duke’s house. (more…)