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A Method Of Creating An Investment Portfolio Comprising The Acts Of Selecting A Number Of Individual Financial Instruments
What is claimed is, A method of creating an investment portfolio, comprising the acts of: selecting a number of individual financial instruments publicly traded on an exchange; allocating individual weight coefficients corresponding said selected financial instruments by giving a larger allocation to an instrument having a larger capitalization and giving a smaller allocation for an instrument having a smaller capitalization in said number of said financial instruments, wherein the ratio of a largest weight coefficient and a smallest weight is limited by a selected maximum; purchasing said selected financial instruments based on said weight coefficients representing relative values between said individual financial instruments; and maintaining substantially said purchased financial instruments for a selected time period regardless of market conditions.
A method of creating an investment portfolio, comprising the acts of: selecting a number of stocks publicly traded on a stock exchange, said number of stocks being larger than about 50; allocating individual weight coefficients corresponding said selected stocks; purchasing said selected stocks based on said weight coefficients representing relative values between said individual stocks; and maintaining substantially said purchased stocks for a selected time period regardless of a market capitalization of any of said stocks.
An asset portfolio, comprising a number of publicly traded financial instruments purchased according to corresponding individual weight coefficients allocated by giving a largest weight coefficient to an instrument having a largest market capitalization and giving a smallest weight coefficients to an instrument having a smallest market capitalization in said number of said financial instruments, wherein the ratio of said largest weight coefficient and said smallest weight coefficient is limited by a selected maximum; said initially purchased financial instruments are substantially maintained for a selected number of years regardless of market conditions.
An asset portfolio, comprising a number of at least fifty publicly traded stocks purchased according to corresponding individual weight coefficients representing relative values between said stocks, wherein said initially purchased stocks are substantially maintained for an initially selected number of years regardless of a market capitalization of any of said stocks.
An system for creating an investment portfolio, comprising an interface for connecting to a database including a number of publicly traded financial instruments; a computer system including a processor for determining individual weight coefficients allocated by giving a largest weight coefficient to an instrument having a largest market capitalization and giving a smallest weight coefficients to an instrument having a smallest market capitalization in said number of said financial instruments, wherein the ratio of said largest weight coefficient and said smallest weight coefficient is limited by a selected maximum; and said computer system being arranged to perform a purchase of selected financial instruments according to said individual weight coefficients.
For centuries businesses have issued publicly traded securities to fund the business' operating capital or enable growth. There are two basic types of securities: bonds that represent debt, and stocks that represent ownership or equity interest in the issuing business. Bonds represent the promise of the business to pay a fixed sum at a specified maturity date plus interest at regular intervals until such date. There are numerous types of bonds such as convertible bonds, income bonds, or linked bonds. Stocks (or units) give an owner a right to a share of dividends and other distributions of the underlying business, to vote for directors and fundamental corporate changes, to inspect the accounting books of the business, and other rights defined by the charter and bylaws of the business as well as by the laws of the country or state in which it is chartered.
Overall, stock markets have provided an efficient way to raise capital. Performance of the entire market or individual market sectors may be monitored using different stock indexes. A stock index includes a selected group of stocks, wherein each stock affects the index in proportion to its relative weight. The relative weight can be selected based on market capitalization, market-share (i.e., number of outstanding shares), or price of the stocks. Thus, there are capitalization weighted indexes, market share-weighted indexes, or price-weighted indexes. Capitalization weighted indexes include NASDAQ Composite Index .RTM., S&P 500.RTM., Wilshire indexes, Equity Index.RTM., Russell Indexes.RTM., and numerous other indexes. Price-weighted indexes include Dow Jones Industrial Average.RTM., Dow Jones Transportation.RTM., and Dow Jones Utilities.RTM..
Stocks, bonds and numerous other financial instruments (e.g., derivatives, stock options, commodity futures or other options) can be held in various types of investment funds and trusts. An investment fund includes a portfolio of securities managed by a management company that serves as an investment adviser (and may also serve as a custodian, shareholder, servicing agent, transfer agent or provide some other secondary service). The management company or the investment advisor selects the financial instruments depending on the type of fund or trust. That is, there are various types of funds including stock funds (e.g., funds that invest in domestic or international stocks, growth or value stocks, small, medium or large capitalization stocks, etc.), bond funds (e.g., funds that invest in U.S government or foreign government bonds, mortgages, convertible bonds, low quality "junk" bonds, etc.), hedge funds, or funds that invest in two or more types of securities such as both stocks and bonds.
Mutual funds, also called open-end investment funds, have existed for decades. In a mutual fund, a shareholder owns a portfolio of financial instruments and receives dividends on the shares that he or she holds. Any day, a shareholder can sell or redeem any of its outstanding shares at net asset value (i.e., the price of a share equals total assets minus liabilities divided by the total number of shares) calculated at the end of a trading day. Similarly, an investor can also buy additional shares of a mutual fund, which in turn will invest the money. Thus an open-end fund can continue to increase its asset base by selling its shares to new shareholders and investing the influx of money in more shares.
There are "actively" managed mutual funds, where the advisor buys and sells securities based on his or her opinion about expected future performance. Here, the turnover ratio and thus the cost can be relatively high compared to index funds. There are also "passively" managed mutual funds where the fund advisor does not have much discretion and invests in a portfolio of securities that mirror a selected market index. Thus, in these funds, the cost is usually fairly low, but the funds have limitations related to the type of index followed, as described below.
Closed-end funds include actively managed or passive portfolios of stocks grouped according to an investment objective. Usually, after the initial sale, shares of closed-end funds are sold on a stock exchange the same way as stocks. Closed-end funds differ from open-end funds in that the number of shares is fixed. There are closed-end funds where a shareholder cannot exchange shares for underlying stock, which contributes to fluctuation of the price of the shares sometimes significantly above or below the net asset value. Low demand for a closed-end fund causes closed-end shares to trade at discounts to net asset value, and high demand creates premiums to the net asset value. In these funds, a shareholder cannot directly take advantage of the discount since he or she cannot exchange the fund shares for the underlying stocks. An investment advisor actively manages the fund, and the fund value (including any discounts or premiums) changes depending on the market conditions and skills of the advisor. Depending on the fund management, these funds may have a high turnover rate and thus high cost.
Passively managed funds are usually low cost, as mentioned above, because the advisor does not have much discretion to trade and thus does not have to have a team of highly compensated managers and analysts. There are numerous index funds that hold a portfolio of securities that mirror a selected market index. The advisor buys and sells the individual securities only when their representation in the underlying index changes, when investors redeem fund shares for cash or when investors purchase additional fund shares. These funds provide investment results that, before expenses, generally correspond to the price and yield performance of the index. As explained below, most indexes are heavily weighted toward large and midsize stocks. Furthermore, the indexes are periodically rebalanced, and the relative stock representation is reduced as a company grows and its stock moves from a micro cap index fund to a small cap index fund or to a mid cap index fund. Thus, the index funds do not effectively accumulate the best performing stocks because they are effectively sold as they move to a larger index fund.
Perhaps the oldest market index is the Dow Jones Industrial Average.RTM.. This index presently includes common stocks of 30 large companies. There are also other Dow Jones indexes such as the Dow Jones 20 Transportation Average.RTM., or the Dow Jones 15 Utilities Average.RTM., or the Dow Jones Composite Average.RTM.. The Dow Jones averages are calculated by adding together the prices of each stock's trading on a primary exchange and dividing the sum by a divisor, which is of course different for each index. The index divisor depends on the stock splits and is designed to maintain "continuity." When a new stock is included, or corporate actions are taken (such as spin-offs, company purchases, stock splits, etc.), the divisor is changed so that the index remains unaffected. The individual Dow Jones averages basically include issues of large companies each having market capitalization of several billions if not hundreds of billions of U.S. dollars. Therefore, mutual funds or trusts based on the Dow Jones Averages do not include small cap or micro cap stocks discussed below.
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