DIVERSIFY BY ASSET ALLOCATION

Why Portfolio Diversification is Important

Fund managers use statistical techniques along with their knowledge and experience to select ‘uncorrelated assets.’ Uncorrelated assets help diversify your portfolio and thus reduce risk. Did you know that the most successful investors are not who you think they are! If you ask people who the most successful investors are, you get responses like Warren Buffett of Berkshire Hathaway; John Neff, formerly of Vanguard's Windsor Fund; or George Soros, the famous hedge fund operator. However, some of the most successful investors from a risk/reward perspective are the large university endowment funds. The endowment funds are highly diversified and contain "uncorrelated assets" inside their portfolios.

 

Correlation is a number ranging from -100% to 100%, derived using historical returns. Asset correlation is a measure of how investments perform with respect to each other and when such movements occur. When assets move in the same direction at the same time, they are ‘highly correlated.’ When one asset moves up while the other goes down, they are ‘negatively correlated.’ A correlation of zero means the assets are ‘uncorrelated’ or ‘non-correlated.’ If two assets are uncorrelated, the price movement of one asset will not have any effect on that of the other. Many of our managed portfolios contain non-correlated assets!

To truly understand the importance of diversification, click the picture below and notice where the different asset classes line up from year to year. The market and asset classes are constantly moving, it's almost impossible to pick the absolute winner each and every year.

Importance of Diversification YE 2021-1.png

In general, investing in stocks, bonds, commodities, and alternative investments can help in dampening the overall volatility of an investment portfolio. Smart diversification absorbs losses of one asset class by balancing it with gains of the other. Investors should find a combination of investments that fits their risk tolerance and long-term investment objectives.

 

You can also use the SMART Investing technique as a guide to achieving long term wealth preservation and growth.

 

 

   S – Safe (Bonds, FDs, and Gold)

   M – Market Linked (Domestic and International Equity, Mutual Funds, ETFs)

   A – Alternative Investments (Real Estate, Private investments, other)

   R – Retirement Planning (Social Security, Income Funds, Pension Funds)

   T – Tax Saving (Tax Planning, Tax Deferred Accounts)

With SMART Investing, you can hold a truly modern and diversified investment portfolio.

 

 

If you are interested in learning how much risk your portfolio is taking on, or how well diversified your portfolio, contact Rise Financial Group to have an Advisor present you with a Morningstar Report, which is like a report card on your current Advisor. (pssst... this is probably something your current Advisor doesn't want you to see!) There is no-cost and no-obligation to have us provide that to you!

 

*Diversification and asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Before investing, you should carefully read the applicable volatility disclosure for each of the underlying funds, which can be found in the current prospectus.