When it comes to investing, we all want the same thing: extremely high returns with zero risk.

Unfortunately, such a situation does not exist. In most cases, there is a direct relationship between and investment’s potential for reward and its inherent risk level. In simple terms, the opportunity for high rewards carries inherent high risk. We can see a good example of this in some recent market activity. It has been difficult to find any industry sectors that have positive returns over the past six months.

Over that time the Nasdaq is off about 15%. Over the past six weeks it has actually had a nice rally. At one point in March it was about 25% below its October 2007 high.

On the chart below, the Nasdaq is shown as the black line. Keep in mind that the Nasdaq has a reputation for nasty volatility. It is not generally considered an appropriate investment vehicle for people who are retired or are moderate or conservative investors. It is easy to understand when one considers the steep loss this index has experienced over the past six months. On the chart, notice that I’ve highlighted a three-day period in November where this index dropped 5%.

The blue line on this chart is iShares Silver Trust (SLV). Precious metals have been one of the strongest sectors over the past six months. In fact, on this chart you can see that this fund is up nearly 15% over that time. Most of us would probably like to have that return. But the downside to the precious metals sector is its high volatility and risk. Look how volatile the blue line is compared to the black line. Notice that in March there was a period of just a couple of days where this fund fell about 25%. Most investors do not have the emotional fortitude to handle those types of swings. And it would be irresponsible for a professional investment manager to invest most clients in a fund with that much volatility.

The gold line is SPDR Series Trust S&P Homebuilders (XHB). We all know that the real estate sector has seen some big losses. But over the past three months, home builders have actually been one of the strongest sectors. Since bottoming in January, this fund is up about 25%. However, over six months its return is zero and there was a one-week period where it fell 17%. Again, this is an example of an investment that is inappropriate for any but the most aggressive of all investors and then only in small doses.

Below I’ve included a listing of the top performing ETFs over the past three months. I eliminated short funds from the list because I wanted to show you the strongest sectors, not the weakest. Notice that energy funds and precious metals are near the top. A few international funds are mixed in along the way.

Although these funds have positive returns for this period, most are too volatile for the majority of investors. The sector that offered the best return for the least risk during this period is government bonds. And you can see that the top funds in this category produced returns of 4% to 5%.

One other significant thing to note is that no major U.S. equity indices show up on this list. There is virtually no representation from traditional U.S. asset classes such as large cap stock funds, value, or even growth.

The U.S. equity market remains in a state of turmoil and there are no signs that the situation is going to change soon. Risk remains very high and the best course for most investors is to remain on the sidelines until we see long-term trends re-emerging.
F.S.

If you would like investment strategies that attempt to minimize risk but still provide the opportunity for solid growth, check out the offerings from Strategis Financial Group. For information, call 800-279-3377.

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This entry was posted on Thursday, May 1st, 2008 at 3:13 pm and is filed under Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.