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| Adrian Mastracci, fee-only
investment counsel at KCM Wealth Management
says, "A diversified portfolio reduces
investment risk because if one selection is
suffering, the others should help cushion
the rest of your portfolio." |
For Immediate Release
Vancouver, BC (May 3, 2002): It's been
said that investment heaven is the place where
high returns are earned all of the time. Could
someone please point the way.
Adrian Mastracci, president & fee-only
investment counsel at Vancouver based KCM Wealth
Management comments, "Diversification
and rebalancing strategies are two essential tools
that assist in achieving better consistency of
returns for your portfolio. They are as close
as you can get to that much sought after investment
heaven."
"Diversification involves spreading your
investment bets across a number of selections,"
explains Mastracci, "Rebalancing involves
periodic tweaks to bring your portfolio back into
line with the appropriate targets and asset mix
set within your game plan."
"My experience is that asset allocation
decisions have the greatest impact on your portfolio
returns than any other factor," remarks Mastracci,
"Hence, the foundation of investing your
nest egg requires patience, discipline, objectivity,
and clear investment policies."
"Look upon diversification as a welcome
safeguard. You don't want problems arising in
any one asset class to ruin your well crafted
portfolio," notes Mastracci, "Therefore,
it's prudent to spread your nest egg across a
variety of investments. That allows you to aim
for consistency of returns and minimize the potential
of significant losses from any one component."
"While portfolio diversification is about
constructing your nest egg with different elements,
selecting the elements is not about always being
right," observes Mastracci, "Part of
your investing experience involves coming to grips
with the prospects of being wrong."
"Diversification allows for the potential
of being right more often than wrong. This is
what successful investing is all about,"
notes Mastracci, "Periodic rebalancing strategies
sell some assets and buy others. Another way to
rebalance is to inject new money into the portfolio."
"Portfolios ought to contain a variety of
asset classes that don't all move in unison,"
explains Mastracci, "Let's look at the results
of the last two years. In 2000, Canadian bonds
were the top asset class while emerging market
equities occupied the basement. In 2001, US small
cap equities were in the winner's circle while
foreign equities drifted to the bottom."
Mastracci outlines some of the paths to achieve
portfolio diversification:
Different Asset Classes
Choosing different asset classes is the first
step of diversification. The most common classes
are equities, bonds, cash and real estate.
Economic Regions
Portfolios may include selections from global
economies outside of Canada. Say the USA, Europe
and the Far East countries.
Exposure to Foreign Currencies
Portfolio selections can be purchased in C$, US$
and the Euro to name a few.
Time to Maturity
A portion of the portfolio could have a range
of investment maturities - from as short as 30
days to as long as 30 years.
Level of Liquidity
Cash components, such as term deposits, could
be easily cashable while real estate holdings
are usually considered less liquid and require
a longer investment horizon.
Type of Security
Portfolios may contain a selection of individual
stocks, mutual funds, ETF's, index funds and hedge
funds.
Management Style
Portfolios may be constructed with active or passive
management styles. Portfolios often choose one
style as the core and include a sprinkling of
the other style.
Sector Emphasis
Some portfolios choose to emphasize specific sectors
of the economy, sometimes to the exclusion of
others.
Investment Quality
Some investors trade investment quality for higher
yields and the potential for bigger losses. An
example is a bond issued by the Government of
Canada versus one rated as a junk bond.
"A diversified portfolio reduces investment
risk because if one selection is suffering, the
others should help cushion the rest of your portfolio,"
explains Mastracci.
"Because a diversified portfolio is assembled
from selections that don't move in unison, the
initial allocation and weights of the portfolio
selections will drift over time," notes Mastracci,
"That drift can become significant, perhaps
also affecting your investment profile."
"Your diversification and rebalancing policies
need attention from time to time," concludes
Mastracci, "Investing your nest egg in a
variety of asset classes reduces portfolio risk
and is a recipe for more consistent results."
"Where do you go from here?" summarizes
Mastracci, "Revisit your asset allocations
to ensure their appropriateness for your situation."
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