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. 

Optimal Portfolio Diagram

A Final Word About Liquidity and Goal-Planning

The liquidity or illiquidity of the assets in the portfolio has to match both the goals of the investor and the portfolio’s ability to fulfill those goals. One of the most important investment decisions is liquidity—the ability to convert an asset to cash immediately. Many investors associate liquidity with lower risk, without fully considering their investment timeframe or the total returns they need to reach their long-term investment targets. An investment portfolio that provides more liquidity than required by the investor’s individual circumstances and investment objectives could compromise yields in the short term and total performance over the long term.  

More Information for Financial Advisors

To find out more, download the informative white paper, Diversifying with Alts: Constructing Portfolios that Reduce Volatility and the Likelihood of Fear-based Selling, available at www.behringerinvestments.com/evolve. This resource helps Financial Advisors hone their expertise in using alternative investments to potentially improve long-term returns by mitigating the effects of volatility that could tempt investors to do the wrong thing at the wrong time.

About Behringer

Behringer creates, manages and distributes specialized investments through a multi-manager approach that presents unique options for allocating capital, managing risk, and diversifying assets. Investments sponsored and managed by the Behringer group of companies have invested into more than $11 billion in assets. For more information, call toll-free 866.655.3600 or visit behringerinvestments.com.

*Diversification does not ensure a profit or guarantee against a loss.

Past performance is neither indicative nor a guarantee of future results.