Diversification Through Asset Allocation

Another way to picture diversification through asset allocation.  This one's from the blog "A Wealth of Common Sense".    It shows that it's pretty hard to pick from one year to the next which asset classes are going to outperform or which will end up being at the bottom of the pile.  Having a diversified portfolio helps to mitigate against that uncertainty.   Using ETFs {where applicable} can aid in this diversification and may also help mitigate the issues of single stock risk on a portfolio.  

How a diversified portfolio might look will vary depending on an individual's unique risk/reward requirements.  However, it is likely that a balanced portfolio will carry similar investments to what is shown above.  Perhaps some of the more risky elements such as commodities will be absent from certain  accounts and cash allocations may vary according to investor needs.  However, the more well recognized asset classes should be present.  In general these asset classes should be present in a portfolio in such a manner so that no single part of the portfolio becomes too large, unless specifically requested by a client.

Also as we discussed earlier in the week, look at how poorly international equities have performed over the past ten years versus domestic stocks.  

Back Monday.