• Diversification• “Most Hated Stock-Market Rally in Years Goes On”• What do we think
Studies show that somewherebetween 77 and 94% of thevariability in your portfoliosreturns are determined by assetallocationWhat is diversification?“… were referring to the attempt by the investor to reduceexposure to risk by investing in various companies acrossdifferent sectors, industries or even countries.”- Most investment professionals agree that althoughdiversification is no guarantee against loss, it is a prudentstrategy to adopt toward your long-range financialobjectives.- to put it simply by spreading your investments across varioussectors or industries with low correlation to each other, youreduce price volatility.- Reduction in volatility because of the combination of possiblelow or negative correlation investments
Asset allocation- There is general agreement that asset allocation is the mostdifficult part of portfolio management- Life is always about risk and reward- Its all about not having all your eggs in one basket- "But in order to diversify correctly, you need to know whatkinds of investments to buy, how much money to put intoeach one, and how to diversify within a particular investmentcategory."- Go for Variety, Not Quantity- Having a lot of investments does not make you diversified.- To be diversified, you need to have lots of different kinds ofinvestments. That means you should have some of all of thefollowing: shares, bonds, property, international securities,and cash.The key is having the right mix ofshares, bonds and cash.This mix of asset classes is knownas your “asset allocation”
For asset allocation to work youneed time for the asset classes to“do, what they must do.”“Time heals most wounds!
Asset Allocation“Ok, Mark, I understandsplitting up myinvestment pie but whatare my options?”The four major asset classes you typically invest in:Cash (or cash substitutes) gives you and your portfolio security andstability.– lowest risk, short-term horizonBonds brings in income – low to medium riskProperty provides both a hedge against inflation and low"correlation" to stocks – medium to high riskEquity helps your portfolio grow – high risk, long-term horizonInternational investments provide growth and help maintain buyingpower in an increasing globalized worldAlso remember:- What is your time horizon- What is your appetite for risk- Do you need income from this investment
Stocks. Bonds. Cash. Others.What is the right mix?
Should my asset allocationchange as I get older?Absolutely! Thats because different investment mixes are riskier than others, and yourtolerance for risk decreases as you age.Whats the best asset allocation for my age?"The old rule of thumb used to be that you should subtract your age from 100 - and thatsthe percentage of your portfolio that you should keep in stocks.”For example, if youre 30, THEN 100 – 30 = you should keep 70% of your portfolio in stocks. Ifyoure 70, you should keep 30% of your portfolio in stocks.However, with investors living longer and longer, many financial planners are nowrecommending that the rule should be closer to 110 or 120 minus your age. Thatsbecause if you need to make your money last longer, youll need the extra growth thatstocks can provide.
"This is ridiculous, Pisani!"they say."It makes no sense. Youcant possibly think you couldexplain this."Bob Pisani“Heres Whats Behind the Stock Market Rally”Massive liquidity,+ Search for yield (higher demand for stocks),+ Modestly higher (record) earnings,+ Heavy stock buybacks (constricting supply),+ Heavy Fed bond buying (constricting supply),= A stock squeeze!
Performance - April 2013Resources Industrials Financials-8.52% -0.08% 0.08%
Top40 forecastExpected 12-month equity performance (All Share)-10%0%10%20%30%40%Base case Bull case Bear case