An often topic of discussion with prospective clients is their existing portfolio asset allocation. I have seen portfolios comprised of 20 technology stocks (no diversification!) and I have seen others that are comprised of 100 different stocks and ETFs (possibly OVER diversified).
​
Therefore, today’s discussion will revolve around asset allocation and how portfolios can be divided by major asset classes and minor asset classes. Most all professional investment managers build their portfolios to be diversified across these asset classes.

Conclusion First:

• MPWM passionately believes in well-diversified portfolio management
• A non-diversified portfolio may provide stronger returns over a shorter-term but may expose you to significantly more risk than desired in the longer-term.

I would much rather build you a portfolio that hits singles and doubles 80% of the time than home runs 50% of the time.

Disclaimer: The breakdown I am going to show you below is basic and general. There are many ways you can break down these assets, but I am going to keep the Major Asset classes in three general categories.

Major Asset Classes:

• Equity (Stock Exposure)
• Fixed Income (Bond Exposure)
• Alternatives

All minor asset classes can then be placed underneath these three major asset classes as follows:

• Equity
• US Large-Cap (Large Companies)
• US Mid-Cap (Medium Companies)
• US Small-Cap (Small Companies) 
• International Developed
• International Emerging
• World
• Fixed Income
• Long-Term Bonds
• Intermediate-Term Bonds
• Short-Term Bonds
• Corporate Bonds
• Government Bonds
• Municipal Bonds
• Mortgage Bonds
• Floating Rate Bonds
• Cash (I consider cash to be an ultra-short component of fixed income)
• And Others
• Alternatives
• Real Estate
• Oil & Gas LPs
• Currency, including Bitcoin
• Commodities
• ETC

As you can see, just from this general list above I have 19 different sub asset class categories! A well-diversified portfolio should be thoughtfully allocated among several different asset classes above, and the reason why is because “ correlation .” 

Correlation
​
Correlation can be defined as the measure of extent two or more variables are related. In relation to building a portfolio, two asset classes that are similarly correlated may perform in a similar manner, therefore even though you may be diversified between sub-asset classes you may not be properly diversified! An easy example of this would be exposure to US Large-Cap and US Mid-Cap which are both similar and closely correlated. More importantly though, is the correlation- or lack of correlation between stocks and bonds. Traditionally this meant that if the stock market went down, the bond market tended to not follow. Conversely, if the bond market went down it may mean the stock market went up. Again, this is all very general with the purpose of keeping this article high level. Some people make careers out of dissecting this topic at length. 

Some Assets Carry More Risk

Speaking very generally here, equity carries more risk than most fixed income, but your possible return is higher. Within equity, the same rings true for Large Cap down to Emerging Markets, more risk as you go down that line but higher possibility of return. So why not just shoot for the moon and place all your assets in the highest possible return class? Well, are you a fan of roller coasters? The daily swings might be enough to make your stomach churn and over time you may end up worse off, which is why MPWM is an advocate of proper portfolio diversification.

So How Does MPWM Build Portfolios?

I believe it is important to begin with your risk tolerance to determine your Major Asset Allocation exposure in terms of a percentage of the portfolio. From there, each sub-asset class will be assigned a percentage of the portfolio based on the exposures we think is important. You can learn more about our portfolio process on our  Investment Approach  page. As an investment manager, I would much rather build a portfolio that hits singles and doubles 80% of the time than home runs 50% of the time.

Conclusion:

• Diversification can help lower your overall risk in the portfolio
• Diversification can provide a smoother ride over time.
• It is possible to be OVER diversified and complicate your portfolio.
• MPWM passionately believes in well-diversified portfolio management
• If you are at all concerned about your portfolio diversification and/or risk, contact me for a complimentary portfolio analysis- no strings attached (seriously). 

If you are not having frequent conversations with your wealth or investment advisor about market strategies, investment management, or financial planning opportunities, you should be, especially in a market like this!  Momentum Private Wealth Management  specializes in Wealth Management as well as Comprehensive Financial Planning. Feel free to reach out to Austin directly at 512.416.8085 or austin@momentumpwm.com. You can also find out more information about MPWM at: www.momentumpwm.com .

You can also read more about Austin on his  LinkedIn Page ,  CFP® Professional Certificate Page , his   NAPFA Page  or on his  XY Planning Network Profile page . ​​​

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Momentum Private Wealth Management, LLC (referred to as “MPWM”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
 
MPWM does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall MPWM be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if MPWM or a MPWM authorized representative has been advised of the possibility of such damages.
 
In no event shall MPWM have any liability to you for damages, losses, and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.