Posted by: Athelon Wealth Management | Posted on: September 20th, 2011 | 0 Comments
Diversification has long been accepted as an effective tool for minimizing risk within a portfolio. This may be accomplished by investing across many different asset classes, security types, geographies and risk levels. A diversified portfolio can be designed to provide a desired level of returns while minimizing the likelihood that a loss on any particular investment would be seriously detrimental to the overall portfolio. The act of simply purchasing a multitude of various securities, however, may not deliver the full range of benefits that a more disciplined and sophisticated diversification strategy may offer.
One of the most important aspects of a diversified portfolio is the respective distribution of the invested capital amongst various investment types (stocks, bonds, REIT’s, mutual funds, etc). This allocation can dictate the probability and severity of losses (downside potential) that investors may be exposed to while pursuing their desired level of returns (upside potential). This is commonly referred to as the “risk/reward ratio”.
Typically, investors seeking rapid growth in their investments relied on portfolios consisting mainly of stocks because they offer the opportunity to participate in significant price increases over short periods of time. Consequently, investors relying mainly on stocks may also be subjected to rapid price decreases if the market turns against them. The tendency of a stock price to experience rapid price changes over time is known as volatility, which is often the cost investors must incur for the opportunity to participate in potentially significant returns.
To decrease exposure to downward movements in the market, investors have often turned to government-backed or highly-rated corporate fixed-income instruments, which are known to be less volatile than stocks. Lower volatility generally means less downside risk, but it also means that your portfolio may not keep pace with inflation. The reason is that investment-grade fixed-income instruments provide a lower level of return when compared to other investment types.
One alternative to investing in a single asset class is to invest in a portfolio consisting of both stocks and fixed-income instruments strategically allocated to achieve a predetermined risk/reward ratio. With this model, more conservative investors may choose to hold a greater percentage of fixed-income holdings, while more aggressive investors seek the greater return potential of stocks. So, for example, a portfolio may consist of 50% stocks and 50% bonds. This allocation provides the investor with an opportunity to achieve growth through stocks and offers some protection against market downturns through bonds. Although there are no guarantees against loss, a proper portfolio allocation may be useful in aligning an individual investor’s needs and goals with their tolerance and capacity for risk.
At Athelon Wealth Management, an Independent Fee-Only Registered Investment Adviser based in Staten Island, New York, diversification is just one of the benefits we provide. We invest heavily in research and work with world-class data suppliers to more effectively navigate the markets and manage risk. Our on-going investment management services include continuous portfolio monitoring to ensure that our clients remain on track to meet their investment goals.
You’ve worked hard for your money. It’s time for your money to return the favor. Please feel free to visit our website to learn more about the investment services we offer. You can also call us at (347) 706-1414 today to get started!
President / Founder
Athelon Wealth Management, LLC
© 2011 Athelon Wealth Management, LLC. Reproduction of any article without attributing to Athelon Wealth Management and linking back to http://athelonwealth.com is not permitted and is an act of plagiarism. However, excerpts from the article can be reproduced only if the author (Alexander Efros, MBA, CPA) and the firm’s name are mentioned (Athelon Wealth Management). Inquiries about any rights regarding the content distribution should be forwarded to email@example.com.
PLEASE NOTE: This web site is for informational purposes only and does not constitute a complete description of our investment services nor does it represent any advice to buy or sell investments or other services. This web site is in no way a solicitation or offer to sell securities or investment advisory services, except, where applicable, in states where we are registered or when an exemption or exclusion from such registration exists. Information throughout this site, whether stock quotes, charts, articles, newsletters, or any statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers, believe reliable but we do not warrant nor guarantee the timeliness or accuracy of this information. Nothing on this web site should be interpreted to state or imply past results are an indication of future performance. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in transmission thereof to the user. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS OR ANY “LINKED” WEB SITE.