Last week I did a little poking at diversification, stating that it failed when needed most. The Great Recession was a good example. During the extreme stresses of the 2008 – 2009 period, most correlations moved toward one, rendering diversification somewhat useless. Government bonds were one asset class that remained non-correlated. Does this mean the concept needs to be abandoned? Certainly not.
Diversification is a powerful method for removing unsystematic risks (risks that are specific and idiosyncratic to a specific security) from a portfolio. Combined with rebalancing, a diversified portfolio does exactly what every investor tries to achieve over time; buy low and sell high. Diversification also works very well in markets that are not in severe stress. But what does it mean to be diversified? An equity portfolio can be diversified with 18 to 30 different holdings. Does it mean the portfolio is without risk? Diversification will zero-out the unsystematic risks in each position, but it does not remove the general risks associated with holding equities (systematic risks). Holding a lot of different positions doesn’t mean portfolio risk has been reduced. Risk is not equal across all positions. The same holds true for different asset classes. Portfolio construction should be done with consideration given to both expected returns and the associated risks. This is what MPT (Modern Portfolio Theory) tried to achieve. Portfolios based on the highest level of return based on a given level of accepted risk (as measured by standard deviation). Post Modern Portfolio Theory (PMPT) advanced this concept to show that understanding the client’s return objective as well as providing a means by which to navigate the portfolio were essential to success.
Portfolio construction is based too often on singular views. Risk parity, equal weighted, and what I call “the naïve N” portfolio (the assets of the portfolio are divided by some arbitrary number and each position is allocated that much capital), are frequently seen. Portfolio construction is more than the number of positions and the return expectation. Giving thought to the sources of risk, the expected return, and the methods used within the portfolio will help you manage your client’s goals to a successful end.
SCI HIGHLIGHTS
SCI Monthly Webinar
OUR NEXT SESSION:
TUESDAY, OCTOBER 9th
@ 12:00 PM CDT
In our next session, we will speak to Billy Hwan of Parnassus Investments.
Mr. Hwan is the Portfolio Manager of Parnassus Endeavor Fund (PARWX), a fund currently held by all SCI models.
Join Jim Baldwin and Bob Dunne on October 9th @ 12:00 PM CDT for another great conversation with an industry leader.
Click here to join the SCI Monthly Webinar
Meet Dr. Ken Sleeper
from Ocean Park Asset Management
You’re Invited!
FRIDAY, OCTOBER 12th
@ 10:00 AM CDT
LaSalle St. Securities Home Office
940 N. Industrial Dr. Elmhurst, IL 60126
Dr. Ken Sleeper will be visiting the LaSalle St. Home Office to discuss the Ocean Park Strategic Income Strategy, fixed income investing in today’s markets and the advantages of Post-Modern Portfolio Theory.
Come discuss your asset strategy options with an industry leader!
Investors with passive asset allocation strategies using AGG – Bloomberg Barclays U.S. Aggregate Bond
Index expecting “broad exposure to the bond market” are being misled. AGG actually represents just a
narrow slice of the bond market, with risk reaching a three decade high and a yield near historic lows.
Please check out the link below…an excellent white paper from Terri Spath, CFA, CFP®, Chief Investment
Officer, Ocean Park Asset Management – our partners who bring us the Ocean Park Strategic Income strategy.
Rebuild Your Core – Constructing a Bond Portfolio to Prosper in a Changing Evironment
Bond portfolio construction can be more effective in a dynamic environment by assembling the portfolio with
puzzle pieces that are not included within the AGG. The biggest challenge may be knowing when to adjust
allocation – a problem that can be solved by following a clearly defined investment process.
LaSalle St. Investment Advisors, LLC
940 N. Industrial Dr.
Elmhurst, IL 60126
Copyright © 2017 LaSalle St. Investment Advisors, LLC., All rights reserved.
As you consider the information provided with the Salt Creek Investors Asset Allocation Platform (the “Program”), please review the following:
The information and descriptions provided about the Program are for educational and information purposes only and should not be used or construed as investment advice, an offer to sell, a solicitation of an offer to buy, a recommendation for any security, or suggest any course of action. LaSalle St. Investment Advisers (“LSIA”) does not guarantee that the information or descriptions supplied about the Program are complete or timely. LSIA makes no warranty with regard to any results obtained from the Program or its deployment. LSIA is not responsible for any direct or incidental loss incurred by relying on information provided about the Program. The allocations presented herein are illustrations and completely hypothetical. None reflect actual investments or investment results and do not reflect allocation of any individual portfolio. Asset allocation and its results vary over time. Other allocations or asset investment categories not offered in the Program may have characteristics similar or superior to those illustrated. Past performance of any model or allocation is no prediction of future results. Neither the Program nor any system/model can predict the future of any market or price movement in a market. Diversification and asset allocation do not guarantee against the risk of investment loss, including risk of loss of principal. Information provided regarding the Program is as of the date of publication and may change at any time without notice. Information has been included which was obtained from third parties and is believed to be reliable and complete. LSIA does not warrant the accuracy or completeness of such information. LSIA is a registered investment advisor and does not provide tax, accounting or legal advice ‒ the information and/or descriptions provided do not constitute such advice. More information regarding LSIA and its investment strategies can be found in the LSIA brochure, ADV Part II, which is available online or through LSIA. Asset allocation may not be suitable for all investors. Before deciding to invest, potential participants should consult with an investment adviser to determine an appropriate investment strategy and methodology which meets the investor’s specific financial needs, objectives, goals, time horizons and risk tolerance. The information and description provided herein has been made without consideration of any investor’s particular suitability for investing in the Program. Asset allocation also involves investment in various asset classes which are not insured by the government. Investing in fixed income and/or high yield securities involves additional concerns including interest rate risk, credit risk and reinvestment rate risk. Investing in securities outside the United States may entail greater risk than investing in domestic U. S. markets. These risks typically include political and economic uncertainty of foreign countries as well as currency exchange fluctuations, including foreign currency exchange rates, political risks, different methods of accounting, financial reporting and foreign taxes. The prospectus accompanying a security should carefully be reviewed before investing. The services described herein are available to persons residing in any state where they would otherwise be contrary to local law or regulation.