Free Wealth Management Guide Building An Effectively Diversified Investment Por | Page 11

The year-by-year returns of world markets vary widely.
To create a portfolio that captures the returns of strong
performing countries each year, it is important to diversify
among both domestic, and international developed and
emerging markets.

As you can see in Portfolio Six, by adding international and
emerging markets we have increased our return from 8.5%
in Portfolio One to 10.5% while keeping the standard deviation at 11.7% . And, our growth of $100,000 has dramatically increased.

Portfolio Six

January 1970 - December 2012
Annualized
Return

Annualized
Standard
Deviation

Growth of
$100,000

Portfolio One
Portfolio Two
Portfolio Three
Portfolio Four

8.5%
8.4%
8.7%
9.0%

11.6%
11.0%

$3,281,865
$3,249,085

10.4%
10.8%

$3,678,586
$4,071,094

Portfolio Five
Portfolio Six

9.9%
10.5%

11.6%
11.7%

$5,681,785
$7,308,479

Summary of Steps One Through Six
This completes the construction of our effectively diversified investment portfolio. The Portfolio Six chart shows
that the growth of $100,000 from 1970 through 2009
went from $3,827,703 in Portfolio One to $7,308,479 in
Portfolio Six, an increase of over $4 million!

U.S. REITs
Micro- 6%
U.S. LV
6% Cap
6%
U.S. SV
6%
Int’l LC
6%
Short/Int. Bonds
Int’l LV
40%
6%
Int’l SC
6%
Int’l SV Emg.
S&P
6%
Mkt. 500
6% 6%

While past performance is not an indicator of future results and while diversification does not guarantee a profit
or protection against a loss, this evidence presents a strong
case for embracing the investment strategy discussed in
this Wealth Guide.

One would tend to think that to provide such a dramatic increase in returns you would have to significantly
increase the risk you are taking. However, the standard
deviation of Portfolio Six was only .10% higher than
Portfolio One. In addition, the number of stocks owned
went from 500 in Portfolio One to over 12,000 in Portfolio Six according to Dimensional Fund Advisors. Owning
this many additional companies is a sound way to reduce
overall risk.

11