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 episode 14 on the Wilson Wealth Management YouTube channel, we look at how an investor’s time horizon in attaining planned financial objectives impacts the Investor Profile.
Remember, you will have multiple time horizons based on your individual financial objectives. We discussed this in “Episode 12: Objectives and Constraints”. Your investing strategy and tactics will be different for your shorter term goals versus long term objectives.
You also need to consider the relationship between your specific time horizon and your investment funding and investment risk levels. If your time horizon is close at hand, but you are a long ways from your goal, then you will need to increase your funding pattern and/or assume more investment risk. The longer out your goal, the greater the flexibility you will have on funding and risk assumption.
Additionally, the concept of time may differ between individuals. Using a phase of life cycle approach is often better than simply age based.
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 12 on the Wilson Wealth Management YouTube channel, we continue our look at Investor Profiles. With the focus on an investor’s financial objectives and personal constraints.
This is extremely important in defining who you are as an investor. What you wish to accomplish in your wealth accumulation goals. What may be holding back your ability to achieve them.
Your financial objectives and constraints will also assist you in arriving at your Target Asset Allocation. An allocation that is unique to your needs.
In this episode, we address:
What are typical financial objectives for most individuals?
Why should you create a matrix to better match investments to an objective?
What are common personal constraints?
What is the relationship between time, risk assumption, and investment funding patterns?
Why should you utilize milestones to help stay on track?