How to Build a Diversified Investment Portfolio

A Conversation with EP Wealth Advisors Director of Portfolio Strategy - Adam Phillips, CFA^®, CFP^®

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.

Diversifying a Portfolio in Breadth and Depth

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.

A Risk-Based Investment Diversification Strategy

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.

The Risk-Return Tradeoff

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.

How Can You Benefit from a Strategic Approach to Investing?

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.

Disclosures:

• EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data referenced. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are of the presenter and are subject to change without notice.
• Past performance is not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy, or product made reference to directly or indirectly, will be profitable or equal to past performance levels. Future financial conditions and events can never be accurately predicted. No analysis, plan, or report has the ability to accurately predict the future.
• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professional(s). Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. Always consult a professional Financial Advisor before implementing or applying any of the approaches or strategies made referenced to directly or indirectly here.
• Any direct or indirect references to investment allocation, specific securities, security sectors, or any investment vehicle(s) should not be taken as a recommendation or solicitation to buy or sell a particular security or invest in any specific investment strategy. There is no guarantee that any of the information or investment strategies discussed will be suitable or profitable.
• Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There can be no assurances that a portfolio will match or exceed any particular benchmark.
• Hiring a qualified advisor and/or diversifying your portfolio do not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any results, projections, or other information being represented in this presentation will be met or sustained.
• All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions, may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. There is also no assurance that a portfolio will match or outperform any particular benchmark.
• EP Wealth Advisors, LLC is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not constitute an endorsement by the SEC, nor does it imply that EP Wealth Advisors Inc. has attained a certain level of skill or ability.