By Selwyn Gerber:

Asset Management

Successful investors have a variety of investments in their portfolios, which can include ETFs based upon international and domestic stocks with varying styles. The well diversified portfolio also includes bonds. Asset allocation is driven by personal circumstances, not simplistic formulas. It is also important to regularly rebalance the portfolio to maintain diversification.

Index based investing

“Diversification is when the ice cream mans branches into selling ponchos”
- Rip Van Winkle Wisdom

Diversification means dividing your total investment portfolio into different types of investments, including stocks, bonds, real estate, and cash. Investors should also be diversified into different investment strategies within those broad categories. Using mutual funds or ETFs for the stock portion of a portfolio, this can mean owning a selection of growth or value funds, small cap, large cap, and/or sector funds. Geographic diversification can be achieved by owning a combination of domestic and international investments.

Exchange Traded Funds

Diversification reduces the risk of a portfolio. This has long been known in the academic community. In 1952, Harry Markowitz published a paper called “Portfolio Selection.” He was later awarded the Nobel Prize in Economics for his work which began with this research. Markowitz developed the idea of selecting stocks to maximize returns given an individual’s tolerance for risk. He provided the math to justify the common sense notion that widows and orphans should hold more conservative investments than a multimillionaire in their early 30s.

http://www.revver.com/video/758305/wealth-management-tax-free-bonds-wealth-enhancement-intelligent-indexing/
http://www.revver.com/video/758319/stocks-tax-free-bonds-wealth-enhancement-intelligent-indexing/
http://www.revver.com/video/758296/equity-investing-tax-free-bonds-wealth-enhancement-intelligent-indexing/

Markowitz stressed the need to think of individual stocks as part of a portfolio. He demonstrated that performance depended upon balancing risk and reward. It was possible to balance risky stocks and safer stocks within a portfolio to provide solid returns with less risk than the overall market. In other words, with proper diversification an investor should be able to beat the market while holding a portfolio which is less risky than the market, despite the fact that within the portfolio there were individual elements that were relatively risky in themselves.

Figure 9-1 shows the relationship between portfolio volatility, as measured by standard deviation, and the number of asset classes in a portfolio. The mathematical concept of standard deviation is usually thought of a measure of risk for any investment. The higher the standard deviation, the more a data series typically varies from its average. In this case, a price history with a higher standard deviation would be considered to be more volatile than an investment option which has a lower measure of standard deviation. Investors prefer steady gains and associate volatility with risk, and that means standard deviation is also a measure of risk.