August 11, 2014
By Brock Kidd,
Investment Consultant for Raymond James Financial Services Inc.
When the stock market has run up as much as it has for the past several months, it is easy to jump into the mode of investing in whatever seems to being doing best – those hot stocks we all hear about at dinner parties. My advice is to slow down, look at your entire portfolio, and invest in what gives you the best diversification among different asset classes.
What? Why not load up in energy stocks, real estate, and commodities, all of which are recently posting extremely high returns? The answer is that it is not the specific stocks that typically produce the best long-term return; it’s the mix of the various asset classes in your overall portfolio that may have the biggest impact on your investments long term performance.
Case in point: a study by Brinson, Singer, and Beebower looked at large portfolios with rolling 10-year returns and surprisingly found that less than 10 percent of the total return was due to market timing and the selection of specific stocks. The other 90 percent was driven by the diversification within the portfolios.
Generally, we find that the most effective means of diversification includes classes of assets that have very little correlation with one another. For instance, blue chip stocks historically behave differently than international bonds, so it makes sense to have both in a portfolio. Otherwise, as one class goes, so goes the entire portfolio.*
Not everyone needs the same mix of asset classes in their portfolio. The right mix for each investor will differ with their long-term financial goals and tolerance for risk. The key is to define the most effective allocation of asset classes to meet your goals, then invest based on that asset allocation model – not on the short-term performance of the market.
For more information contact your financial advisor or Brock Kidd at email@example.com; 615-744-3751, 2300 West End Ave., Nashville TN 37203 OSJ phone: 615-744-3730
* Please be aware that diversification does not assure a profit and does not protect against loss in declining markets.
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