Counterintuitive Strategies

Here at RAW I think it is important to have a wide coverage of investing themes and strategies to compliment the typical soundbites the media gives us. A common investment strategy that works against the common investor is the concept of chasing returns. This would involve analyzing any stock or mutual fund based on its prior return characteristics. Often this results in the purchase of securities that have already completed their "run" and are at a higher risk of below average returns or even declines. This is the stereotypical "buy high and sell low" that causes the headaches for the "home gamer" as Jim Cramer would call it.

When looking at the fad of the day it is important to keep this effect in mind. Institutional money managers and at home traders will tell you that by the time a story becomes public knowledge it is too late. The run is over. Gold is the perfect example here after we have seen the pull-back from well above $700 a troy ounce. The market had been pushing gold etfs and mutual funds as the next big opportunity. Those individuals who seek to make fast short term gains with disregard to the risks associated will often be those who allow market volatility to dictate the downside of their investment (i.e. they are buying at statistically higher than average prices).

When feeling the common urge to seek out these alternative investments, may I suggest limited your portfolios exposure to these riskier instruments. Perhaps looking at a diversified commodity ETF or fund to round out your investments could help you actually diversify away a portion of the risk. I personally would limit my exposure to being no greater than 10% of my portfolio as a whole for even the riskiest investor profile. These diversified commodities funds may allow you to capture the value that can be seen in rising oil prices, the gold fever, and the various commodities used for producing ethanol.