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A Perfect Portfolio
The concept of a diversified portfolio was sorely tested in 2008-2009. It seemed that every asset class what hit equally hard. The S&P 500 lost 37%, but an index of intermediate term treasury bonds increased by 19%. Many investors who had positions in bonds lost considerably less than those totally invested in equities. A number of our clients had overall losses of 10% and less.
The concept of a diversified portfolio was sorely tested in 2008-2009. It seemed that every asset class what hit equally hard. The S&P 500 lost 37%, but an index of intermediate term treasury bonds increased by 19%. Many investors who had positions in bonds lost considerably less than those totally invested in equities. A number of our clients had overall losses of 10% and less.
The point is, diversification still works, and we can construct a portfolio that will cushion losses in bad years. It will also ensure that we participate when a single asset class has a particularly good year. The key to diversification is “low correlation”. This means that I have funds in asset classes that move in different directions from others, or if they move in the same direction, they do so at very different degrees.
The first step in cushioning against losses is to introduce bonds to your portfolio. Too much in bonds will reduce positive performance and too little won’t help much. Experience has shown that somewhere between 28% and 40% is an optimum allocation to bonds. The more aggressive the investor, the lower the allocation to bonds.
In both stocks and bonds, diversification means that we have invested in a number of market segments. Bonds can be short, intermediate or long in duration. They can be government or corporate. Stocks can be large cap, like “blue chips”, mid cap or small. They can be domestic, foreign or international. They can be specialized in real estate, energy or other industries. The key is to be broadly invested in as many segments of the market as possible.
As time goes by, diversified portfolios need to be “re-balanced” since some market segments will outperform others, and change is required in order to bring the overall portfolio into balance. We recommend that this be done an annual basis.
Any investor, using available investment alternatives, can create and maintain a portfolio that perfectly represents their investment posture – very aggressive, aggressive, moderate and conservative. This can be accomplished at very low cost, and easily maintained. Mutual funds, exchange traded funds and unit investment trusts enable us to achieve and maintain diversification at very low costs, with the flexibility needed to re-balance.
We are happy to provide readers with specific model portfolios that we have developed. Please contact us.
The point is, diversification still works, and we can construct a portfolio that will cushion losses in bad years. It will also ensure that we participate when a single asset class has a particularly good year. The key to diversification is “low correlation”. This means that I have funds in asset classes that move in different directions from others, or if they move in the same direction, they do so at very different degrees.
The first step in cushioning against losses is to introduce bonds to your portfolio. Too much in bonds will reduce positive performance and too little won’t help much. Experience has shown that somewhere between 28% and 40% is an optimum allocation to bonds. The more aggressive the investor, the lower the allocation to bonds.
In both stocks and bonds, diversification means that we have invested in a number of market segments. Bonds can be short, intermediate or long in duration. They can be government or corporate. Stocks can be large cap, like “blue chips”, mid cap or small. They can be domestic, foreign or international. They can be specialized in real estate, energy or other industries. The key is to be broadly invested in as many segments of the market as possible.
As time goes by, diversified portfolios need to be “re-balanced” since some market segments will outperform others, and change is required in order to bring the overall portfolio into balance. We recommend that this be done an annual basis.
Any investor, using available investment alternatives, can create and maintain a portfolio that perfectly represents their investment posture – very aggressive, aggressive, moderate and conservative. This can be accomplished at very low cost, and easily maintained. Mutual funds, exchange traded funds and unit investment trusts enable us to achieve and maintain diversification at very low costs, with the flexibility needed to re-balance.
We are happy to provide readers with specific model portfolios that we have developed. Please contact us.