Free Wealth Management Guide Building An Effectively Diversified Investment Por | Seite 2

other words, the higher the standard deviation, the higher the volatility and hence, the greater the risk. enables investors to potentially reduce the overall risk in their portfolios and increase their long-term potential returns. Asset Allocation Asset classes are the building blocks of an investment portfolio. Asset classes include small and large cap stocks, value and growth stocks, domestic and international stocks, emerging market stocks, real estate, government bonds and corporate bonds. Asset allocation is the division of a portfolio’s investments among asset classes to balance expected risk and expected reward. The Asset Class Performance Chart below illustrates how all asset classes go through up and down cycles. Each column contains colored boxes representing nine different asset classes plus the CPI (Consumer Price Index), a measure of inflation. The top performing asset class each year is ranked at the top of the chart and the worst performing asset class is at the bottom. Effective Diversification Everyone has heard the saying “Don’t put all of your eggs in one basket”. Not everyone, however, understands the difference between effective and ineffective diversification. Effective diversification combines multiple asset classes that have low correlation with each other. Effective diversification As you can see, there is random movement of each asset class. The best performing asset class in one year is often the worst or close to the worst performing asset class the next year. Many investors tend to pick their investments based upon the recent performance of that investment. This is another reason many investors are frustrated with the results they achieve. The Need for Diversification Asset Class Index Performance 1998-2012 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Annualized Returns Large Growth Emerging Markets REITs Small Value 5 Year Gov't Small Value REITs Emerging Markets REITs Emerging Markets 5 Year Gov't Emerging Markets Small Value 5 Year Gov't Large Value Emerging Markets 36.65% 66.49% 26.37% 40.59% 12.95% 74.48% 31.58% 34.00% 35.06% 39.42% 13.11% 78.51% 34.59% 9.46% 28.03% 8.96% S&P 500 Index Small Growth 5 Ye