Where most index funds strive to absolutely match the performance of, say, the
S & P 500, these custom-designed index funds seek to do even better – exploiting and benefit from discerned inefficiencies while still maintaining the lower-risk profile inherent in indexing.
Based on proprietary, disciplined and scientific selections of U. S. and global market asset classes, The Holland Portfolios are "custom" versions of indexing.
Why is volatility so important?
This is perhaps the most misunderstood element in investing. Volatility
refers to the fluctuation – the up or down movement – in the prices of stocks, bonds
and other investment vehicles.
Volatility in the markets can never be totally eliminated, nor should it be. Here's why:
The fact is, without volatility in individual securities, stock sectors, asset classes and even national economies, positive returns would be impossible – a continuously horizontal line profits no one. For the same reason, negative returns would be
impossible too.
Thus it would be correct to say volatility is what makes the market. If there
were no risk whatsoever, and no return, investing would be pointless.
As every student of investing knows: risk and return are correlated.
But although volatility in a particular stock price or sector is inevitable (and,
to some extent, desirable), volatility across an index or a properly allocated model can
be dramatically reduced. Reducing volatility relative to returns – gaining the maximum benefit of increased prices and values while minimizing the "downside" impact of the market's internal workings – is what indexed investing is all about.
An excellent analogy is that of an Olympic decathlon athlete.
There are 10 decathlon events. An athlete undoubtedly will not win every
event, or perhaps even finish among the top five. But he or she may win three or four events – and do well enough in the others that superior overall (i.e., averaged) performance captures the gold.
Active investing, continuing the analogy, attempts to pick (and "bet" on) those
individual events the athlete might win outright – and ignores other so-so events. Passive or index investing, on the other hand, evaluates the athlete's overall prospects, allocates to reflect all included events
and invests in his or her total performance.
In this model, volatility is the ups and downs of individual-event performance within a much larger framework. Thus a properly diversified and allocated investment model takes into account individual stock or sector volatility but - so to speak - smoothens the ride.
What are "exchange trade funds"?
These are similar to index funds. One well known example of an ETF are SPDRs (or "Spiders"), which invest in all of the stocks comprising the S & P 500.
(cont.)
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