|
The Importance of Diversification
Diversifying
is placing your eggs into more than one basket. By doing so, you can reduce
the chances of having all your assets in one investment that performs
poorly, while increasing your chance of having at least some of your
assets in an investment that does well.
The
potential benefits of diversification are illustrated in the graph shown
here:
In this hypothetical scenario, an investor holding Security A experiences fluctuation in the value of his or her investment. Likewise,
an investor holding Security B experiences the same kind of volatility. By diversifying their portfolios, including both shares of Security A and Security
B in equal amounts, these investors have the potential to
effectively balance their risk. Because downward movements in one
security can be offset by upward movements in another, overall portfolio
volatility may be lessened.
The manner in which you allocate your assets among stocks and
bonds may be an important factor in investment success and may account
for much of your portfolio's performance1. But the growth of
the world's economies has fostered a multitude of investment options,
both domestic and international, from which to choose. And, there are
currently thousands of mutual funds available that package these
securities together in endless combinations, making it difficult for an investor to select and maintain a combination of investments
that has a good potential for growth.
Through
my relationship with Legend Advisory Corporation, my clients have access
to asset allocation programs including the Strategic
Asset Management (SAM)®/SAM® Select Portfolios and the Freemark Managed Portfolios. These services were designed to make
professional diversification techniques, investment selection and
ongoing investment management available to individual investors. SAM® and SAM® Select and Freemark feature actively managed mutual fund portfolios with objectives
that range from conservative to aggressive. In line with each model’s
objective, the portfolios seek to hold an optimal mix of mutual funds
with the potential to maximize returns while attempting to minimize risk.
1 Source: Brinson, Gary P.; Hood, L. Randolph; Beebower, Gilbert L., "Determinants of
Portfolio Performance," Financial Analysts Journal, Vol. 42, No. 4 (July/August 1986)
pp. 39-48.
|
