A rule of thumb for diversification

Claymore Investments, Inc. 15 May, 2010 | 4:27AM

The degree of diversification is an independent choice for each investor. Because older investors have a shorter investment horizon and are generally more risk averse, and younger investors have a longer investment horizon and are generally more risk tolerant, a general rule of thumb for investors creating a balanced portfolio is to match the weight in bonds to the age of the investor. For example, a 60-year-old investor would consider having 60% or more allocated to bonds and 40% or less allocated to stocks. A 30-year-old investor would consider having 30% in bonds and 70% or so in stocks.

Because exchange-traded funds provide exposure to a diversified group of stocks or bonds in a single product, not only do they add diversification but they also can simplify the portfolio construction and management.

For example, to construct a balanced portfolio for a more conservative investor, one may start by setting the bond allocation at 60% and the stock allocation to 40%. The bond component could be split equally with 20% to a government bond ETF, a corporate bond ETF and a real return bond ETF. The stock component could be equally weighted with 10% in a Canadian stock ETF, a U.S. stock ETF, an international stock ETF and an emerging market stock ETF.

In this example, using just seven ETFs provided a balanced portfolio with diversification across two different asset classes -- stocks and bonds -- and seven different asset categories.

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Claymore Investments, Inc.

Claymore Investments, Inc.