The Importance of a Diversified Portfolio
By Wyatt Boleky, Jack Brett, & Kelly MacDonaldJuly 13, 2018
Why is it important to have a diversified portfolio?
One of the key aspects of being successful when investing is knowing how to manage your portfolio properly. A lot of people invest only in stocks, or only in bonds, or only other types of securities. This approach leads to the major idea we are going to discuss today, which is diversification. Diversification should go hand-in-hand with investment portfolios. When you diversify your portfolio, you are lowering the volatility of your portfolio.
Diversification is a crucial element to optimizing the return of your portfolio. Diversification is the allocation of assets across a portfolio, which can include stocks, bonds, ETFs, and other investable securities (instead of just one security). Having investments in all these different securities and industries means that you have a more balanced portfolio and minimizes the possible huge ups and downs from the stock market your portfolio could undergo if it held only one security or one type of security.
Stocks take a more aggressive stance, and some people consider stocks to be the most volatile asset class. Bonds go well with stocks in a portfolio because they are less aggressive and normally help prevent huge changes in the stock market from damaging your portfolio. ETFs are another good type of security to have in your diversified portfolio because they normally very inexpensive and passive. They also are easy to buy and sell during most hours of the day, just like stocks. ETFs, like mutual funds, hold large basket of securities, which make them naturally more diversified than stocks. Having these securities (along with others in your portfolio) creates an opportunity for more success with less overall risk over the long term.
Diversification allows investors to reduce the overall volatility of their portfolio by attributing risk to non-mutual industries. In other words, if a security in one industry declines, that does not necessarily mean that the security in a different industry will also decline. Diversification reduces “diversifiable” risk. This type of risk is company-specific, meaning that risk that one company faces is not necessarily the same risk faced by a different company. Therefore, if a portfolio is diversified across several different sectors and industries, this “diversifiable” risk is greatly mitigated.
A type of risk that diversification does not eliminate is market risk, or “undiversifiable” risk. This type of risk consists of factors that every company faces on a day-to-day basis, including inflation, interest rates, exchange rates, political instability, etc. This risk will always be present in the market no matter how diversified your portfolio may be. It is crucial to find the perfect balance between asset classes to keep your risk at an acceptable minimum. Chicago Partners has a specific way of building optimal portfolios for our clients.
A type of risk that diversification does not eliminate is market risk, or “undiversifiable” risk. This type of risk consists of factors that every company faces on a day-to-day basis, including inflation, interest rates, exchange rates, political instability, etc. This risk will always be present in the market no matter how diversified your portfolio may be.
The Chicago Partners Diversification Philosophy
At Chicago Partners, we believe in building a portfolio that has assets in different sectors of the markets, as well as investing in all different types of securities including stocks, bonds, ETFs, and indexes. We build a well-diversified portfolio with asset classes like U.S. Large Cap, Global Real Estate, U.S. Fixed Income, High Yield, and preferred securities, among others. In addition to high expected returns, CP also focuses on identifying the volatility of the stock and potential risks associated with that investment. Stocks are usually subject to a higher standard deviation of risk than bonds or ETFs, but that increased risk can pay off in higher expected returns. Therefore, it is important to find a balance between how many and what type of individual securities we put into a portfolio to make sure returns are consistent.
One way we do this is by investing into indexes instead of individual stocks themselves. Multiple different indexes exist for sectors like AI, healthcare, and e-commerce, which include different individual stocks that make up that specific sector. An index could contain anywhere from five to a hundred stocks, so instead of relying on one stock to make or break your return, we rely on multiple different stocks.
Having a diversified portfolio helps lower the volatility of your portfolio. A diversified investment portfolio contains all these different securities such as stocks, bonds, ETFs, and more, which can make your portfolio more balanced. One of the most important factors that investors take into consideration when building a portfolio is the amount of risk that they wish to take. With a properly diversified portfolio, this risk can be greatly reduced. The market is constantly changing, and diversification can be the key to surviving the swings.
Wyatt Boleky is a Summer 2018 Intern at Chicago Partners Wealth Advisors. Wyatt is currently a Junior at Miami University working towards a degree in Finance.
Jack Brett is a Summer 2018 Intern at Chicago Partners Wealth Advisors. Jack is currently a Senior at Indiana University working towards a degree in Accounting and Finance.
Kelly MacDonald is a Summer 2018 Intern at Chicago Partners Wealth Advisors. Kelly is going to be a Sophomore at the University of Illinois Urbana-Champaign and is working towards a degree in finance.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC-“CP”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember that if you are a CP client, it remains your responsibility to advise CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. CP is neither a law firm nor a certified public accounting firm, and no portion of the blog content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: CP does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to CP’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
July 13, 2018
Why is it important to have a diversified portfolio?
One of the key aspects of being successful when investing is knowing how to manage your portfolio properly. A lot of people invest only in stocks, or only in bonds, or only other types of securities. This approach leads to the major idea we are going to discuss today, which is diversification. Diversification should go hand-in-hand with investment portfolios. When you diversify your portfolio, you are lowering the volatility of your portfolio.
Diversification is a crucial element to optimizing the return of your portfolio. Diversification is the allocation of assets across a portfolio, which can include stocks, bonds, ETFs, and other investable securities (instead of just one security). Having investments in all these different securities and industries means that you have a more balanced portfolio and minimizes the possible huge ups and downs from the stock market your portfolio could undergo if it held only one security or one type of security.
Stocks take a more aggressive stance, and some people consider stocks to be the most volatile asset class. Bonds go well with stocks in a portfolio because they are less aggressive and normally help prevent huge changes in the stock market from damaging your portfolio. ETFs are another good type of security to have in your diversified portfolio because they normally very inexpensive and passive. They also are easy to buy and sell during most hours of the day, just like stocks. ETFs, like mutual funds, hold large basket of securities, which make them naturally more diversified than stocks. Having these securities (along with others in your portfolio) creates an opportunity for more success with less overall risk over the long term.
Diversification allows investors to reduce the overall volatility of their portfolio by attributing risk to non-mutual industries. In other words, if a security in one industry declines, that does not necessarily mean that the security in a different industry will also decline. Diversification reduces “diversifiable” risk. This type of risk is company-specific, meaning that risk that one company faces is not necessarily the same risk faced by a different company. Therefore, if a portfolio is diversified across several different sectors and industries, this “diversifiable” risk is greatly mitigated.
A type of risk that diversification does not eliminate is market risk, or “undiversifiable” risk. This type of risk consists of factors that every company faces on a day-to-day basis, including inflation, interest rates, exchange rates, political instability, etc. This risk will always be present in the market no matter how diversified your portfolio may be. It is crucial to find the perfect balance between asset classes to keep your risk at an acceptable minimum. Chicago Partners has a specific way of building optimal portfolios for our clients.
A type of risk that diversification does not eliminate is market risk, or “undiversifiable” risk. This type of risk consists of factors that every company faces on a day-to-day basis, including inflation, interest rates, exchange rates, political instability, etc. This risk will always be present in the market no matter how diversified your portfolio may be.
The Chicago Partners Diversification Philosophy
At Chicago Partners, we believe in building a portfolio that has assets in different sectors of the markets, as well as investing in all different types of securities including stocks, bonds, ETFs, and indexes. We build a well-diversified portfolio with asset classes like U.S. Large Cap, Global Real Estate, U.S. Fixed Income, High Yield, and preferred securities, among others. In addition to high expected returns, CP also focuses on identifying the volatility of the stock and potential risks associated with that investment. Stocks are usually subject to a higher standard deviation of risk than bonds or ETFs, but that increased risk can pay off in higher expected returns. Therefore, it is important to find a balance between how many and what type of individual securities we put into a portfolio to make sure returns are consistent.
One way we do this is by investing into indexes instead of individual stocks themselves. Multiple different indexes exist for sectors like AI, healthcare, and e-commerce, which include different individual stocks that make up that specific sector. An index could contain anywhere from five to a hundred stocks, so instead of relying on one stock to make or break your return, we rely on multiple different stocks.
Having a diversified portfolio helps lower the volatility of your portfolio. A diversified investment portfolio contains all these different securities such as stocks, bonds, ETFs, and more, which can make your portfolio more balanced. One of the most important factors that investors take into consideration when building a portfolio is the amount of risk that they wish to take. With a properly diversified portfolio, this risk can be greatly reduced. The market is constantly changing, and diversification can be the key to surviving the swings.
Wyatt Boleky is a Summer 2018 Intern at Chicago Partners Wealth Advisors. Wyatt is currently a Junior at Miami University working towards a degree in Finance.
Jack Brett is a Summer 2018 Intern at Chicago Partners Wealth Advisors. Jack is currently a Senior at Indiana University working towards a degree in Accounting and Finance.
Kelly MacDonald is a Summer 2018 Intern at Chicago Partners Wealth Advisors. Kelly is going to be a Sophomore at the University of Illinois Urbana-Champaign and is working towards a degree in finance.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.