Advisors’ portfolio construction “needs to evolve” and adjustments must be made regularly to meet investors’ aspirations, according to James Peterson, senior vice president of Charles Schwab Investment Advisory.
To accomplish that, advisors must make sure they are addressing four key areas, said Peterson, who spoke at last week’s Schwab Impact conference in San Diego.
First, advisors must think about expected returns and the fact they’re lower than actual returns, he said in a session called “Revisiting Modern Portfolio Theory: Does Global Diversification Still Work?”
Second, advisors must make sure to factor in “bouts of volatility” through better risk-measurement techniques, he said.
Third, advisors need to address the “changing correlations” of different assets in a portfolio over time based on market conditions, he noted.
And fourth, “pay attention to risk allocations” via “thoughtful portfolio construction and asset class selection,” Peterson cautioned.
He also warned that, as the investing world has become more globalized, investors really should be expanding their investment horizons by diversifying portfolios to include opportunities outside the U.S.