Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
We believe in diversification that goes beyond the broad asset classes of stocks versus bonds. For example, even with the asset class of stocks, there is room for diversification. Stocks may be diversified in large-cap U.S. stocks, small-cap stocks, international stocks, by sector or industry, and so on. It's important to not only diversify by broad asset classes, but also diversify within an asset class.
Even though markets move in cycles, it’s easy to be surprised. A diversified portfolio may help to smooth out the ride. We approach that by trying to measure the risk of a portfolio based on its expected return. The measure we use is standard deviation—which simply means the implied volatility of the portfolio. Let’s say you had a portfolio that’s expected to return 10 percent in a given year, with a standard deviation of 5 percent. That means two-thirds of the time, the portfolio’s actual returns would be expected to fall somewhere in the range of 10 plus or minus five, or between 5 percent and 15 percent. Realistically, the standard deviation for a ten percent return these days would likely be quite a bit higher. But this is the way we test a portfolio to determine whether its diversification is expected to deliver the risk characteristics appropriate for a given client.
No matter one’s personal investment goals, a general principle in investing is that to achieve a higher rate of return one has to expose themselves to a higher degree of risk. The"risk-free rate" is the federal interest rate compensating those holding U.S. Treasury Notes provided by the U.S. government—it is called the "risk-free rate" because it is backed by the full faith and credit of the U.S. government. Other securities not backed by the U.S. government carry varying degrees of additional risk, and, in theory, should offer additional compensation for carrying that risk. Investors should carefully consider an investment's additional risk relative the additional compensation for being exposed to that risk. This direct relationship is what we refer to as the risk-return tradeoff.
With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
This is #4 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Asset Allocation, Why We Diversify, How to Buy a Stock, How to Buy a Bond, Concentrated Positions, etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.
The EP Wealth Advisors financial planning process starts with the relationship between you and your financial advisor. How do you value a financial coach? Developing a partnership that ensures we understand your goals lets us help you prioritize and organize your financial decisions—so you can achieve peace of mind and live your life.
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