The importance of a diversified portfolio
Having a financial portfolio comprised of diverse assets in different asset classes could help you realize positive returns while avoiding a catastrophe.
Director of Portfolio Management
An investment portfolio for high net-worth-individuals (HNWI) generally incorporates different types of investments such as stocks, bonds, real estate, and alternative assets. Each type of these investments, often called ‘asset classes,’ generally respond differently to developments in the global economy.
Each asset class has its own distinct historical return profile, but all asset classes experience some level of volatility as economic cycles and market conditions ebb and flow. A basic tenet of investing is portfolio diversification reduces risk.
What is portfolio diversification?
Simply put, portfolio diversification means having different types of investments in your portfolio, such as stocks, bonds, cash equivalents, and real estate, as well as a variety of those types.
Portfolio diversification is important and may vary depending on one’s time horizon, risk tolerance, and investment experience. Beginning investors, with solid savings and a long runway until retirement may have a different diversification strategy than someone who recently sold a business and is settling down for retirement.
Those with many investment years in front of them could possibly assume a little more risk for a potential greater reward with a portfolio comprised of more volatile asset classes as they have time to recover, if necessary, from a year that was less than favorable.
It’s important to note that U.S. stock is represented by the S&P 500, bonds are represented by the Bloomberg Barclays Aggregate index, foreign stock is represented by the MSCI EAFE index and cash equivalents are represented by the FTSE 91-day Treasury bill. And for U.S. Treasury bills, notes and bonds are backed by the full faith and credit of the U.S. government.
"Portfolio diversification can enhance portfolio performance and reduce portfolio volatility. It just makes sense from returns and security standpoints. Over time one can take advantage of investments that historically grow, while at the same time avoiding what could be catastrophic losses."
Vivian Hairston
Director of Portfolio Management, Huntington Private Bank®
Why is portfolio diversification important?
The benefits of a diversification strategy are two-fold and can occur simultaneously-reduce loss and increase gain. In simpler terms, you can win while losing. Spreading your money across assets in different asset classes can greatly reduce the chance of significant losses.
Portfolio diversification and management
Patience is a virtue when it comes to investing because trying to time the market may result in missing out on the best investment performance of a given asset class. But monitoring, and when appropriate, rebalancing one’s portfolio is key.
There are different methods to manage your portfolio from hands-on to hands-off methods.
- Active portfolio management involves monitoring and rebalancing, in response to changes in the economic outlook.
- Passive portfolio management is more hands-off, usually incurs fewer fees and is intended to mirror returns of a particular benchmark or index.
- Professional discretionary portfolio management engages an experienced advisor or team to actively manage the portfolio by rebalancing and making changes to the underlying securities in response to changes in the economic outlook and market conditions.
Getting the advice you may need
Your financial portfolio, whether aggressive, conservative, or somewhere in between, may provide good, solid returns if it is diversified and if you’re patient. Connect with your Huntington Private Bank advisor to outline a plan that can help situate your portfolio in a good place. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.
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