The stock market has gone on a roller-coaster ride lately, with the S&P 500 (^GPSC) having plunged almost 7.5 percent in a four-week span and the Dow Jones industrials (^DJI) falling more than 1,100 points between mid-September and mid-October. With the return of market volatility, many investors feel nervous about the prospects for their future returns and don't want to run the risk of further losses.
All stock investments involve risk, but some exchange-traded funds aim at market segments that tend to be less prone to big swings. By investing in these ETFs, you might be able to get all or most of the return potential of a broader-market investment without all the bumps in the road. Let's look at how three ETFs have done during this drop.
This iShares ETF seeks to provide exposure to U.S. stocks with a reduced risk profile, with the goal of minimizing the stock market's ups and downs. In explaining why an investor might want to own this ETF, iShares points out that it may help reduce your losses during declining markets but still produce positive returns when the stock market goes up.
It's important to understand that minimum volatility funds like the iShares ETF won't eliminate downdrafts but will only reduce their impact. Even with that warning, though, so far during the latest market turbulence, the iShares ETF has delivered on its investment objective. Its decline of just 3.5 percent is less than half of the broader market's drop, showing the value of a portfolio rich in health care and consumer stocks. With relatively small allocations to hard-hit sectors like energy and materials, the iShares ETF will continue to outperform as long as the recent crosscurrents in the market continue to favor its core portfolio.
This PowerShares ETF uses a somewhat similar investment objective as the iShares ETF. It looks at all 500 stocks in the index and then selects the 100 that have the lowest volatility measures over the preceding 12 months. With regular rebalancing every quarter, stocks will move in and out of the ETF on a periodic basis. Yet overall, the ETF's portfolio aims to retain the stalwarts of the index.
Interestingly, the PowerShares ETF has a much different sector focus than the iShares ETF, with its largest allocations in financial and utility stocks. With this different philosophy, the PowerShares ETF has recently done better than its iShares counterpart, declining only 2.5 percent or about a third of the broader market's fall over the same period.
The iShares Select Dividend ETF isn't specifically aimed at lower-volatility stocks; it emphasizes companies that pay high dividends. iShares selects 100 stocks that have at least five years' worth of dividend payments and looks for those that pay the healthiest yields.
The payouts from dividend stocks generally help them be less volatile than the broader market, as investors can count on at least a base level of income no matter what happens to major market indexes. Moreover, many investors like dividend ETFs like this iShares entry because their income makes it easier to invest for the long run rather than continually having to sell shares to generate necessary cash.
During the stock market's swoon, the iShares Select Dividend ETF has fallen about 4.25 percent, which is still a much smaller drop than that of the S&P 500. That alone doesn't prove that dividend stocks make good low-volatility investments, but with more than half its assets in utilities and consumer stocks, this ETF will likely maintain a relatively smooth ride even if the market drops further.
No stock investment is completely free of risk. But by looking at lower-volatility options like these ETFs, you can do your best to stay comfortable with your investing over the long haul.
10 Financial Land Mines That Can Decimate Your Net Worth
Scared of a Market Crash? These Funds Offer a Smoother Ride
Managed to get that raise or promotion? Fantastic -- now don't go out there and spend it all immediately. In classic "keeping up with the Joneses" fashion, too many of us see an increase in salary or a sudden windfall (like an inheritance) as an excuse to take our lifestyle up a notch. We buy bigger houses than we need, get the latest gadgets even though ours work just fine,and spring for fancy steak dinners just because we can.
Instead, whenever your financial situation gets a boost, consider the best ways to put that money to work for you. The truly wealthy are those whose money continues to grow and earn them more, even when they're not actively doing anything with it.
The average American household that carries credit card debt holds a balance of around $15,000. If you're among those who have a credit card balance, you've probably seen the little chart on your monthly statement telling you how much you'll pay in interest over the next several years if you make only the minimum payment. (If you haven't, look at it.) The same chart will also compare that to a "suggested" payment that's slightly higher.
Our recommendation? Throw everything you can at paying your balances off as fast as possible. And make sure not to take on any additional debt in the future; if you can't pay for a consumer good out of pocket, don't finance it.
We don't demonize student loan debt the way we do credit card debt because we see an education as an investment -- and higher education often is the difference between one income bracket and another. Similarly, many people justify taking out a car loan by stating that they need a car to get to work.
That said, debt is still debt, and the longer you take to pay it off, the more interest you'll pay. Once you've freed yourself of credit card debt, paying down your car and student loan balances should be next on your list.
Whether it's to handle an unexpected car repair, a sudden illness or a major plumbing problem, you should always have some money set aside to cover unforeseen expenses. Set up a regular monthly transfer from your checking to your savings account to earmark this money before you're tempted to touch it. If necessary, cut back in another budget category (like eating out or entertainment) to free up the funds to save more.
Putting aside a little each month could prevent you from getting socked with a hefty bill you can't afford and then need to finance.
No matter your age, you should be adding to your retirement funds -- such as your 401(k) or individual retirement account -- each month. Just setting aside money sporadically won't cut it; you need to identify how much you'll need to live on once you stop working and monitor whether you're on track to reach that amount.
Here's a quick-and-dirty rule of thumb: multiply your annual spending by 25. This is the amount you'll need in your retirement portfolio, if you assume that you'll withdraw 4 percent per year to live on during your retirement. In other words, you'd need $1 million in your portfolio to live on $40,000 annually. Creating a plan will help you make sure you're able to retire the way you envision.
A home is a big investment, and sometimes that investment doesn't wind up netting you the return you thought it would.
The biggest culprit is having too large a balance on your mortgage, which detracts from your own personal stake in the current market value for your home. The sooner you pay this amount down, the better your home equity will be.
You also want to be careful when purchasing a new home. Buying in a neighborhood that's on the downward spiral or buying the most expensive home on the block, likely won't net you a good return when it's time to sell. Also take care to stay away from custom renovations (like turning the garage into a recreation room), which could negatively affect your resale value.
Paying high investment fees eats away at your gains. And since your gains compound over time, this creates a domino effect that can really chip away at your wealth. Take a close look at your investment companies' fees and shop around to make sure they're not taking more of your money than they need to be.
If you don't have a long-term investment vision and are simply playing the market, you could seriously undermine your wealth-building potential. Stop paying attention to market fluctuations, media pundits and the stories of your friends and family. Instead, create your own long-term investment strategy that will maximize your overall returns. Resist the urge it play it ultra-conservative (or fall for get-rich-quick schemes) and educate yourself on the best way to make your dollars work for you.
If you're having trouble making sense of your options or want a second opinion, seek the help of a trusted financial adviser.
Based on your experience and seniority level, education and industry, you should have a fairly good idea how much you ought to be making at your job. If you don't, check out a site like PayScale to get a ballpark figure.
If you're not making what you're worth, you're doing more than leaving money on the table; you're also losing all the compound growth and investment returns that money could be generating for you. Invest in yourself with professional development and continuing education, make the case for that raise or promotion, or seek out a company who will value you higher.
If you don't have proper insurance coverage, you're taking a very big risk that could come back to bite you. Too many people think the worst can't happen to them, but the hard truth is you can't predict the future, and scrimping on sufficient insurance is never a good idea.
Of all the things we're hesitate to part with our money for, adequate insurance coverage should not be one of them. No matter your age, everyone should be properly covered with:
Homeowner's or renter's insurance.
Flood insurance (if you live in a flood-prone area).
Umbrella liability insurance (especially if you own a small business).
If a spouse or children relies on you for support, make sure you have a decent term life insurance policy, as well.