Free Wealth Management Guide Building An Effectively Diversified Investment Por | Page 8

Portfolio Three (adding real estate)
Real estate offers the potential for current income and capital appreciation. Over the long term, real estate has provided a significant hedge against inflation. Adding real estate to the portfolio through professionally managed Real Estate
Investment Trusts (REITs) has the potential to increase the annualized return and decreased the annualized standard
deviation.

Portfolio Three

January 1970 - December 2012
Annualized
Return

Portfolio One
Portfolio Two
Portfolio Three

Annualized
Standard
Deviation

Growth of
$100,000

8.5%
8.4%
8.7%

11.6%
11.0%
10.4%

$3,281,865
$3,249,085
$3,678,586

REITs
12%
S&P 500
48%

Short/Int.
Bonds
40%

Portfolio Four

(adding small companies)
The S&P 500 index is comprised of
500 of the largest U.S. companies. In
my experience as an investment advisor,
the typical investment portfolio of most
people is comprised mainly of large U.S.
companies. As you can see in the chart
to the right, small companies have outperformed large companies over time.
Although adding small companies to our
portfolio slightly increased the standard
deviation, it did increase the return and
growth of wealth.

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