In episode 16 on the Wilson Wealth Management YouTube channel, we begin our look at portfolio diversification. As well as its key component, asset correlation.
Another crucial piece in successful wealth accumulation. Proper diversification is the best means to manage investment risk in a portfolio. By so doing, it may allow you to invest in relatively higher risk assets, which will provide higher expected returns.
By not doing so, you will end up with inefficient investment portfolios. With greater than warranted risk and/or lower than optimal expected returns.
As with compound returns, properly understanding and incorporating diversification techniques into your investing strategy will allow for better performance and cumulative growth.
So we will spend some time on diversification. In this episode, we address:
What is diversification?
Why is it so important for investors in successfully accumulating wealth?
Investopedia states that “Diversification is a risk management technique that mixes a wide variety of investments within a portfolio.” True.
But what constitutes “wide”? 5, 50, 500 investments?
And what sort of “variety” do you require to properly diversify?
Investopedia also states “that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security.”
Is that accurate?
Finally, what is asset correlation? How does it factor in to diversifying your portfolio?
In episode 15 on the Wilson Wealth Management YouTube channel, we examine compound returns and its significant impact on wealth accumulation and investing success over time.
We indirectly looked at this concept in episode 14 on time horizons. How your available time to reach a financial objective will impact your funding requirements and the level of investment risk that must be assumed.
The time you allow your money to grow is crucial to wealth accumulation. In fact, over longer time periods, it is the income earned on previous income earned that is the bulk of your wealth growth. Not what you actually contributed to the investment account. Perhaps hard to believe. But, as we shall see, quite true.
Understanding the “power of compounding” is crucial for investors. In this episode, we look at:
What is simple return?
What is compound return? How does it differ from simple returns? Using an example from the world of Harry Potter.
What are the keys to maximizing your use of compounding in your own portfolios?
What are the three interrelated variables in compound growth? We drill a little deeper into how time horizon, risk, and funding impact each other.
What are the two biggest drags on your ability to build your wealth?
We finish our analysis with comparison of the Ant and the Grasshopper. Sadly, not the Aesop’s Fable. Instead, a real world example of compound returns in action.
Hopefully, you will see the value in beginning your investing program early in life. Utilizing tax-free and tax-deferred investment accounts. And working to minimize your investment costs. So that your capital can compound your benefit, not grow in accounts of your bank, advisor, or government.
In this episode on the Wilson Wealth Management YouTube channel, we continue our look at the Investor Profile. The focus in this session is on an investor’s risk tolerance and working to become a more rational investor.
Your level of risk tolerance plays a significant role in your investment portfolio’s target asset allocation. So your personal risk appetite must be understood if you wish to create an optimal portfolio. Specifically:
What “visceral” aspects of your personality and lifetime experiences impact risk tolerance?
Investment risk, expected returns, time horizon, and funding your portfolio. How do the interrelationships between these factors play a part in the level of risk you may want to assume?
How do Investor Psychographic Models, like the Bailard, Biehl, & Kaiser Five-Way Model, help you better understand your current risk profile? And perhaps provide ideas on how to shift boxes?
What is meant by a more “rational approach” to risk? Why should this be your goal?
In episode 9 on the Wilson Wealth Management YouTube channel, we look at how to compare different investment returns. With so many return calculations available, what are the differences between measures? Which investment returns provide the best information for investor analysis?
How do gross returns compare with net returns? Realized versus unrealized? Base versus local currency?
Why is it important to differentiate?
What is the difference between arithmetic mean and median returns? When should each be utilized in analysis? What are the advantages and disadvantages of each measure?
Can geometric (time weighted) or dollar weighted (internal rate) mean calculations address the limitations of arithmetic mean? Thereby helping investors make better decisions.
What investment return time periods are commonly presented to investors? Why is it important to differentiate by time when assessing asset performance?
What is the difference between nominal and expected returns? How does investment risk (i.e., standard deviation) play a part in this comparison?
How do I know if my investment performance is good or bad? What other return types are there to assist in evaluating my investment results?