BUILDING A DIVERSIFIED PORTFOLIO

^{By Louis Green, CFA®, CFP®, CRPS®}

Building a Diversified Portfolio

Consider building a diversified portfolio to reduce risk and help balance returns. Be aware of how much of your portfolio is invested in a single asset class, strategy, or company. Consider how each asset class you own contributes to your portfolio. While over-allocating to an asset that has recently outperformed could provide short-term gains, you should consider what may happen if that asset suddenly starts to drop in value.

The following example from Y Charts illustrates the projected annual returns and risk for various portfolios.

 Efficient Frontier: Your Current Portfolio vs. Recommended Portfolio ¹

^{The example above is hypothetical and should only be used for illustrative purposes.  This example is not based}

^{on an actual client experience or portfolio, but rather, it is intended to demonstrate hypothetical scenarios.}

In this example the “Client’s Current Portfolio” has an expected average return of 6.08% and an expected risk of 13.35%. The “Clients Recommended Portfolio” per the chart, offers a higher projected annual return of 6.75% and a lower projected risk of 9.63%. In this context, risk is defined as the standard deviation aka the dispersion from the mean return.

You may want to consider structuring a portfolio that can potentially generate the returns needed to meet reasonable goals while assuming an appropriate level of risk for your specific situation. Remember your portfolio should be customized to your specific needs.

Monitoring and Adjusting Your Investments

Review your asset allocation, asset classes, and performance at least annually, as well as after a life event such as a marriage, divorce, or retirement. Revisit your asset allocation after large market moves because your asset allocation might change considerably as your asset values change. Evaluate whether your portfolio continues to reflect your risk tolerance. Consider making changes to the weights of each asset class in your portfolio as economic and market conditions change.

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1 YCharts. Efficient Frontier: Your Current Portfolio vs. Recommended Profile. [February 23rd, 2023]