People are different, and so are investment strategies. “Diversified portfolio” is commonplace speak nowadays, but what is it? A diversified portfolio can help an investor reduce the volatility of specific asset price movements and manage the overall risk of the portfolio. Although not a guaranteed strategy against loss, diversification may be one of the most widely used investment strategies in reaching long-range financial goals while also minimizing risk. Investing in many different areas across various industries, categories, or financial instruments may help you steer clear of “putting all your eggs in one basket.” In doing so, your portfolio’s sensitivity to market swings, either positive or negative, most likely will be minimized.
Within a diversified portfolio, you’ll likely find a mix of stocks (equity), bonds (fixed income), cash, and possibly some alternative investments, such as real estate. The most traditional diversified portfolio is the 60/40, with 60% of your assets dedicated to equities and roughly 40% of your portfolio in fixed income. As every investor is different, however, there are different diversified portfolios dependent on risk tolerance, investment horizon, and other factors. Following are the four general categories of diversified portfolios.
Conservative – Otherwise known as an “income” portfolio, this portfolio is tailored more for investors who have a low-risk tolerance and likely desire income, while still protecting their capital from loss. These portfolios range from a 20%-30% for equities while dedicating 70%-80% to fixed income.
Balanced – Drawing investors seeking both income and capital appreciation, with a willingness to assume slightly more risk than those with a conservative portfolio, a typical balanced portfolio ranges from 50%-60% equities with 40-50% dedicated to fixed income.
Growth – As an investor who potentially is willing to accept more risk, a growth portfolio invests more in equities than fixed income. Growth portfolio investors aim for higher growth potential and have medium to high risk tolerance. A typical growth portfolio consists of a 75%-80% equities and 20%-25% fixed income mix.
Aggressive Growth – Designed for investors willing to assume a high risk and can tolerate sudden up-and-down movements in the portfolio’s value, aggressive growth portfolios range from 80%-85% equities with 15%-20% fixed income.
Now that we have a sense of the four major types of investment portfolios, we’ll take a look at where some additional risk can be assumed. As most of the listed portfolios invest in well-established economies, investment vehicles, or developed markets with less risk, sometimes investors wish to seek to invest in companies, countries, or economies with seemingly greater potential upside.
Emerging market economies are countries described as being “in the process” of becoming developed economies. These emerging market economies, although on the course to becoming fully industrialized, typically have a unified currency, a stock market, and a backing system. While these emerging market economies may offer greater return potential, an investor must also be wary of the inherent risks to due to their emerging market status and greater volatility. Emerging market economies are also at risk of being less liquid because some assets may be harder to sell. Currently, notable countries considered to be emerging market economies are India, Mexico, Russia, Pakistan, Saudi Arabia, Brazil, and China.
Although producing greater risk, the potential upside for investing in emerging market economies may be attractive to some investors. Identifying opportunities in emerging markets may be a great addition to your diversified portfolio, depending on your choice of investment strategies. While a conservative portfolio investor may shy away from emerging market opportunities, an aggressive growth investor may eagerly embrace them. Exchange-traded funds (ETFs) may be an option for investors willing to accept risks associated with adding emerging markets to their portfolios.
Over the last 20 years, interest in investing in emerging markets has spiked, although exercising caution is good practice and demonstrates prudence. Not all emerging markets are created equal. Collaborating with your PCG Wealth Advisor to perform a comprehensive assessment of your portfolio and understanding your risk tolerance, may help you determine if adding emerging markets fits your unique financial plan and your chosen investment strategy.
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