When you have a portfolio of all kinds of fun security-goodies, you can calculate the “beta,” which is the overall risk your portfolio has (in comparison to the market, or to a set benchmark).
You can tinker with individual eggs in your basket to make your beta more or less risky. As people get closer to retirement, usually you want your beta to get less risky, which means closer to zero. When you’re at a beta of one, your risk is equal to the market, or your benchmark. Above one means you’re living on the edge, taking on more risk for the hope of higher returns.
A zero-beta portfolio is when there’s zero systematic risk, which is when your beta is zero. If you had a portfolio with a beta of zero, you could watch everyone rejoice at bull markets and weep in the corner during bear markets while your portfolio is completely unaffected by any of those market changes. This is good if you’re close to retirement, since that’s not the time to be playing with the potential to lose a lot of money, which you’ll need as your income.
So how is the zero-beta portfolio achieved? You can balance things out by pairing together a mutual fund or ETF with a bond fund that has a negative beta. Don’t forget: a portfolio could include “alternative” securities like real estate and land, which are safe from stock market fluctuations, and futures contracts, which can help an investor hedge bets on the market. Living the zero-beta-portfolio life may be a boring ride, but it’s a green pasture if the rest of the economy turns into a desert.
Related or Semi-related Video
Finance: What does it mean to rebalance ...1 Views
finance a la shmoop what does it mean to rebalance an account alright people
here's your account pretty broad-based equity portfolio and pretty pie chart -
they're nice going there editor's 17% bank and insurance 14%
telecommunications 9% consumer comestibles 6% drugs legal ones 11%
chemicals in commodities 8% transport and whoa 35% tech well just five years
ago Tech was only 15 percent of your portfolio and it performs better than
double the returns of the rest of the market in that time period so Wow what
time is it need a high tech watch to answer no its rebalancing time why well
because you want to just compound at market rates and yes Tech has been
amazing and wonderful and loving but Tech can get crushed in bad times as
well and the huge 37% exposure to it is well keeping you up at night and it's
see it's gotten up 2% there since we started this video it's just too much [girl waking up in bed at night]
risk attributed to one relatively narrow area of the investing economy even [pie with a risk tag on it]
though it touches everything well you're thinking about making tech more
representative of a balanced broad S&P 500 index fund where in that fund it [S&P 500 document]
represents on only say 11 or 12 percent so you sell some Apple you sell some
Google you sell some Amazon Facebook Netflix Microsoft and you buy a [company logos]
smattering of high dividend high yielding defensive stocks like Chevron [military plane flying]
for Dow Chemical and Bank of America it's kind of defensive in practice [company logos]
portfolio managers rebalance their portfolios all the time so they
represent the promise they made to investors when they raise the money in [scale with tech out-weighted by diverse products]
the first place to be a fully diversified fund taking only market risk
in the process and if they still need to do any rebalancing beyond that and well [people doing yoga in park]
then they just enroll in a hot yoga class
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