by Richard E. Reyes, CFP
As stated before, the word diversification, as well as, asset allocation are common misused financial terms used by investors and the financial industry itself.
Diversification is simply the concept of not putting all your eggs in one basket. We know this sounds like a kindergarten lesson but please bear with us because even though this seems like a basic foundation of your investments, I will tell you that over 90% of the people we meet are so poorly diversified that they are at great risk.
One of the major components of diversification is proper asset allocation. Your portfolio is properly diversified when you own asset categories with price movements that do not mimic each other. Allocating your assets wisely and prudently over widely divergent asset classes is the key to preserving and growing your wealth.
Let’s think as asset classes as ownership of groups of different size and types of domestic and international stocks and bonds; i.e. domestic large-growth companies, domestic small cap companies, domestic large and small companies that are distressed, micro-caps which are extremely small companies combined with the same type of international companies. In addition, to a combination of fixed domestic and global bonds.
An efficient portfolio actually incorporates this important concept for two reasons;
1. No one can predict returns. Many asset classes are dissimilar to one another, move independently of each other, and have different market cycles.
2. By incorporating proper asset allocation you are actually able to design a portfolio that by combining these various unique asset classes whose risk and correlation vary, you can build a portfolio whose risk diminishes and whose return actually increases over time.
So how many stocks does one need? Broad based diversification is the way to go. A truly diversified portfolio may have over 12,000 individual stocks spread over 50+ countries and various different asset classes. Very few investors actually are wise enough to do this.
If you are not a client and need to review your portfolio call me or e-mail
Richard@thefinancialqb.com and let’s get your portfolio on track once and for all. Remember approximately 92% of your portfolios returns is determined by this. So this is very important.
If you are looking for a brief, plain-English introdution to investing, don’t forget to BUY my book, Dirty Filthy Lies My Broker Taught Me & 101 Truths to Money and Investing. Order my book now and I will also send you my Investor Awareness Guide and listen to our The Seven Deadly Investor Traps that Destroy Your Wealth and the Three Power Strategies to Fix Your Portfolio Fast! These materials will equip you with the information you need to begin putting your investment experience back on track.
Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com. Richard E. Reyes, CFP is an Investment Advisor and President of Wealth & Business Planning Group, LLC (The Financial Quarterback™).