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How
diversified should a portfolio be?
There is
no exactly right answer to this question.
Some would argue that diversification is
more important than ever considering increased complexity and lack of
transparency into many of the world’s
largest companies. Diversification,
while it cannot ensure a profit or protect
against loss, is one tool that allows investors to
mitigate some types of unnecessary risk
while still allowing for growth potential over time.
A diversified portfolio of varying types of
assets will tend to produce steadier returns
over time than a non-diversified portfolio
that produces robust returns in one period,
often to find outsized losses in another
period. How, then, can investors balance risk taking with longer-run
wealth accumulation?
Prioritizing and Compartmentalizing:
Core / Satellite Approach to Investing
 An
obvious answer to this dilemma is to divide
pools of assets into two layers. The first
layer should be designed to have maximum
diversification and be designed primarily to
provide downside protection, while the second
layer should be more risk-seeking, be less
diverse, and be designed with a primary goal
of upside potential. (Notice that in this model I do not say that
the primary goal of either layer should be
the only goal.) This strategy is
sometimes referred to as a CORE and
SATELLITE strategy.
Taking
Calculated Risks:
The Case for Active Management
Within each layer,
we believe there is a value to active
management where an attempt should be made
to take on calculated risks within the
comfort zone of each investor.
Calculating these risks relative to expected
return is where Washington
Crossing Advisors can add value, without
incurring unnecessary risk over the course
of a full market cycle. We do this by
tilting portfolio weights away from those
portfolios that appear overvalued compared
to alternative assets or are not expected to
perform well in the unfolding economic
environment. Thus, a CONQUEST separately
managed account can provide an effective
core layer of your portfolio strategy.
Remaining Flexible:
Why Choices Matter
As we mature as investors, our needs change
and our portfolio strategy must adapt with
those changes. Otherwise, we may
experience discomfort when the strategy
produces the wrong level of risk-taking for
whatever circumstances confront us as life
changes. For this reason, we
offer variations on each of our individual
portfolios and are willing to work with your
other trusted advisors to develop an overall
approach that you are comfortable with and
designed with your long-run goals in mind.
It Is "Time In The Market"
That Matters Most
An old adage says that "It is
time in the market
— not timing
the market that matters most." We
couldn't agree more. In order to
experience the benefits of "time in the
market," however, we must remain
within our comfort zone during the markets'
often vicious gyrations in order to
maintain both sanity and long-run
perspective. This is why we believe there is no
single issue as important as balance through diversification
when investing.
Are You Diversified?
There
is
no one right answer, and I can't tell you.
Only you and your trusted advisors can
answer that. But I have come up with five questions that
I have found helpful when thinking about
money and building wealth in the markets. I invite you to think about
these questions in light of your current
investment strategy. If the answer to
each question is "yes," then you are well on
your way. If not, we are happy to
speak with you and any of your other trusted advisors
to help you find a solution that you can
feel comfortable with.
Joe Battipaglia's five questions:
- Is my overall portfolio strategy diversified among
asset types and styles of investment?
- At each layer of assets, is there a
process in place for taking only calculated risk?
- Is the overall strategy flexible enough to adapt
easily to changing circumstances?
- Do I have the ability to
periodically review the performance of
the overall strategy?
- During review, am I comfortable with the
overall result both in terms of return
and volatility?
If the answer was "yes" to each of these questions, you will
likely find it much easier to stay on the path
toward achieving your long-run goals.
As a result, you have a greater chance of
success. If
the answer was "no," Washington Crossing Advisors
may be able to help.
We
welcome any and all questions and look
forward to working with you and your trusted
advisors.
For information, please call us at
973-549-4052 or click
here, and we will send a package
of literature to you about our programs.
Thank you.
Joseph V. Battipaglia
Market Strategist and Chief Investment
Officer
Washington Crossing Advisors
Stifel Nicolaus |
