Podcast Center
Video Center
Webcasts
Resource Center
Events
November 11, 2014 at 07:00 PM
Successful portfolio diversification doesn’t happen in a vacuum or follow a standard formula. In assembling a workable portfolio tailored specifically to an individual client, the key issue is to find out what the client wants to do with all or part of those funds. How does the client expect the assets to perform over the short-term and long term? Most importantly, what if portfolio performance doesn’t meet expectations? Will the client push the eject button and bail from assets, thus locking in any loss? On the other hand, what worked for your client? Have your client go back to the time that gave wisdom and act on what was learned.
Intellect vs. Emotion in Asset Allocation
The Case for Diversifying a Portfolio
Fear and greed can be big motivations when building or reshuffling a portfolio. The fearful person who sold in a panic in 2002 and 2008 is probably a lot like the greedy person who jumped into those investment waters without knowing what risks might lurk below the surface. Ask your client the following question: What do you do in moments of portfolio pain and how do you react to new opportunities? The answer determines the type of investor your client is and whether they are ready to go beyond their comfort zone in the familiar world of stocks and bonds and wade into the new territory of select alternative investments.
Diversification: The One Controllable Variable*
Is there a need for a monthly check and also a need to reduce portfolio drawdown, which can devastate a retiree’s security during later years? If so, then consider a discussion about the power of diversification that covers how:
- Diversification can smooth out the bumps along the road on the journey to portfolio success.
- Private equities/debt can ease those moments of stress when the markets behave differently from what was expected.
Zeroing in on the diversification process:
- Participate in various asset classes, but don’t assume investments are diversified because they appear so on the surface. Globalization has caused correlation among seemingly diverse investment classes. What happens in Des Moines can affect what happens in Singapore, for example, since technology links various markets at the click of a mouse.
- Reallocate existing investments. Have market conditions or investor behavior thrown allocation out of whack? Then it’s time to get the allocation back in line with the client’s goals.
- Harvesting gains and redeploying funds into new opportunities is a time-honored strategy for success.
- Add new investments in new asset classes. Don’t assume that illiquidity is a bad feature or that liquidity can reduce risk. Show clients the data about their real rate of return and how they can protect gains and guard against losses through diversification.
The Diversification Game Plan
The starting line for successful portfolio reconstruction is determining what asset classes are missing from your client’s portfolio and adding in selected securities that match their goal and risk profile. Suggest adding alternatives in proportion to the investor’s tolerance for risk. Alternatives can provide a good hedge for assets already owned.
A Final Word About Liquidity and Goal-Planning
