Wealth Management Blog | WrapManager | Portfolio Diversification Strategy

Should You Invest Your Entire Investment Portfolio in a Single Management Strategy?

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

September 4, 2018

Should You Invest Your Entire Investment Portfolio in a Single Management Strategy?

We’ve all heard the term “don’t put all your eggs in one basket”. Of course, this concept can be easily applied to investing. Many sophisticated investors understand that investing in only one stock, or only one asset class, or only one anything is risky. However, the question of whether or not you should invest in just one money manager is rarely directly addressed.

A key objective of diversified investing is to build a portfolio that is spread across multiple asset classes in an effort to lower the overall volatility of the portfolio.

If you invest your entire portfolio in one single stock it’s clear that your entire portfolio will be tied to the fortunes, and therefore risk of that one company. Adding additional investments to the portfolio can lower the overall volatility and risk of the portfolio, especially if you are adding additional holdings with low correlations to one another.

In other words, if your portfolio zigs, you want to add something that zags to get the most effective diversification benefit.

To take this further, if your portfolio is made up entirely of one large cap telecom stock, adding a second and third large cap telecom stock may give you little in the way diversification benefit if each of these companies have similar factors that drive their returns. Ideally, a portfolio will be well diversified among different sectors. That way, if one sector is performing poorly, this poor performance may be offset by other sectors with stronger performance. Likewise, geographical diversification is important to help mitigate the impact of a poorly performing market.

Which is Less Volatile, Stocks or Bonds? Doug's Quiz Corner

June 20, 2017

Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug explores portfolio volatility. Consider this Scenario: Your friend Margaret has recently inherited some money and is considering how to invest it. Her current portfolio is invested exclusively in long term US Government bonds. She is leaning toward investing the inheritance in more long-term US Government bonds, but her friend Tiffany has suggested that Margaret invest this inheritance in a diversified portfolio of stocks instead of buying more bonds. The inheritance will make up 10% of her total portfolio. Margaret isn’t so sure and she tells Tiffany, “I’m not comfortable with volatility in my portfolio. I want to have as little volatility as possible. So I’m leaning toward just adding more long-term US Government bonds since bonds typically have less volatility than stocks.” If her goal is to have as little volatility as possible in her portfolio – which investment option for the addition, is most likely to achieve Margaret’s goal: 1) more long-term US Government bonds of the same duration as her existing holidngs or 2) a diversified portfolio of stocks? [+] Read More

The "Diversification" that Few People Talk About

February 24, 2016

The benefits of investment diversification have long been known, heralded, and applied to portfolio management. And that’s not likely to change going forward either – it seems highly unlikely that sometime in the future we’ll look back on diversification as some kind of antiquated investment tool that no longer works effectively. That’s because asset prices have been volatile for as long as anyone can remember, and they move in all different directions at different times. While diversification and asset allocation do not ensure a profit or guarantee against loss, the theory of diversification that “everyone talks about” is if you own a portion of each asset class in your portfolio, you can attempt to neutralize the impact of individual price changes—smoothing out returns with lower volatility. [+] Read More

A Different Way of Looking at Market Volatility

November 11, 2015

Recent market volatility has likely raised fresh doubts with some investors about where the market is headed from here. The S&P 500 and the Dow Jones both fell over 10% in just a few trading days late in August,1 and concerning headlines about growth in China have persisted over the last few weeks (though the market has recovered a bit over that time). But don’t let the volatility lure you away from your long-term investment strategy. As investors, it’s tempting to experience declines (especially when they happen quickly like in August), and to want to react—to take your portfolio more defensive or to sell out of stocks altogether. It’s human nature, but it can also hurt more than it helps. The repercussions of ‘reacting’ can indeed have a significant impact on the investment returns you generate over time. Take a moment to study the chart below. As you can see, with $10,000 invested over 20 years, you would have over $65,000 had you stayed invested even throughout two bear markets. But if you missed just the 10 best days over that time, you would have an eyebrow-raising $30,000 less. That’s more than half of what you could have earned, in just 10 days! Miss the 40 best days, and you actually end up losing money. [+] Read More

Does it Still Make Sense to Diversify Your Portfolio?

December 16, 2014

As we approach the end of each year, we like to take a look back at which areas of the market outperformed others. As investors, this allows us to analyze why certain areas of the market may have done better than others, and it make us think about what we can expect looking forward into the coming year. Pulling up performance for this year-to-date (as of December 16th) shows us that US stocks as measured by the S&P 500 outperformed Europe, Asia and the Far East (EFA), and small cap stocks (IWM): Click for larger view These differences in performance may lead investors to wonder… [+] Read More