• About us
    • Who we are
    • Mission
  • Contacts
  • English
    • Português (Portuguese (Portugal))
    • Español (Spanish)
    • Français (French)
  • Login
  • Register
Investorpolis
Advertisement
  • Home
  • Investing Series Guide
    • All
    • I. Goal Based Investing
    • II. Compounding & Inflation
    • III. Assets Risks & Returns
    • IV. Efficient Diversification
    • IX. Sustainable Investing and ESG
    • V. The Investor
    • VI. Assets and Investments
    • VII. Index Funds
    • VIII. Successful Investing
    • XI. Other Topics
    Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds

    Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds

    Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it

    Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it

    Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis

    Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis

    Simple Portfolio Series (DIY) Part 2: The Traditional Portfolio 60/40, what it is, for whom, and its performance

    Simple Portfolio Series (DIY) Part 2: The Traditional Portfolio 60/40, what it is, for whom, and its performance

    Simple or Lazy Portfolio Series (DIY): Part 1 – Overview

    Simple or Lazy Portfolio Series (DIY): Part 1 – Overview

    Choosing Mutual Funds Series: Part 5 – Funds availability and currency of investment

    Choosing Mutual Funds Series: Part 5 – Funds availability and currency of investment

    Trending Tags

      • I. Goal Based Investing
      • II. Compounding & Inflation
      • III. Assets Risks & Returns
      • IV. Efficient Diversification
      • V. The Investor
      • VI. Assets and Investments
      • VIII. Successful Investing
      • IX. Sustainable Investing and ESG
      • X. Kits and Tips
      • XI. Other Topics
    • Wealth and Investing
      • All
      • Investing
      • Wealth
      The world’s best investors use different strategies, but they have in common the patience of a long-term perspective.

      The world’s best investors use different strategies, but they have in common the patience of a long-term perspective.

      The assets allocation in the world reflects the countries economic development and their financial system

      The assets allocation in the world reflects the countries economic development and their financial system

      How Women invest: Part 2 – The results are equivalent to those of men, but with significant differences in investment management

      How Women invest: Part 2 – The results are equivalent to those of men, but with significant differences in investment management

      Outlook 2023: Part 5 – 2023 will be a transitional year with two halves

      Outlook 2023: Part 5 – 2023 will be a transitional year with two halves

      Outlook 2023: Part 4 – In changing economic cycle, policies, and market sentiment, valuation matters become more than ever

      Outlook 2023: Part 4 – In changing economic cycle, policies, and market sentiment, valuation matters become more than ever

      Outlook 2023: Part 3 – 2022 was bad for investments, but was not the same for everything

      Outlook 2023: Part 3 – 2022 was bad for investments, but was not the same for everything

      Trending Tags

        • Investing
        • Wealth
      • Retirement & Savings
        • All
        • Retirement
        • Savings
        Retirement Series: How much money do we need to live through retirement?

        Retirement Series: How much money do we need to live through retirement?

        Retirement Series: Part 1 – Overview – A backwards view

        Retirement Series: Part 1 – Overview – A backwards view

        How many years do our public or social pensions last?

        What is the replacement rate of retirement pensions?

        How many years will we live in retirement?

        Planning for a good financial life in retirement

        Trending Tags

          • Retirement
          • Savings
        • Tools
          • All
          • Calculators
          • Publications
          • Sites and apps
          Morningstar Rating for Funds

          Morningstar Rating for Funds

          Morningstar’s European Active/Passive Barometer

          Morningstar’s European Active/Passive Barometer

          Morningstar’s U.S. Active vs. Passive Barometer

          Morningstar’s U.S. Active vs. Passive Barometer

          The Power of Dividends: Past, Present, and Future, Hartford Funds, 2021

          The Power of Dividends: Past, Present, and Future, Hartford Funds, 2021

          OECD Corporate Governance Factbook 2021

          OECD Corporate Governance Factbook 2021

          G20/OECD Principles of Corporate Governance, 2015

          G20/OECD Principles of Corporate Governance, 2015

          Trending Tags

          • calculators
          • Calculators
          • Publications
          • Sites and apps
        • More
          • All
          • Best of
          Best Of Mutual Funds Series: Dividend Stocks for Investors Outside the U.S.

          Best Of Mutual Funds Series: Dividend Stocks for Investors Outside the U.S.

          Best Of Mutual Funds Series: Dividend Stocks for U.S. Investors

          Best Of Mutual Funds Series: Dividend Stocks for U.S. Investors

          Best Of Mutual Funds Series: Investment Grade Bonds, Indexed, for Eurozone Investors

          Best Of Mutual Funds Series: Investment Grade Bonds, Indexed, for Eurozone Investors

          Best Of Mutual Funds Series: US Bonds, Indexed, for US Investors

          Best Of Mutual Funds Series: US Bonds, Indexed, for US Investors

          Best Of Mutual Funds Series: Passive, US Large Stocks, for Non-US Investors

          Best Of Mutual Funds Series: Passive, US Large Stocks, for Non-US Investors

          Best Of Mutual Funds Series: Passive Large US Stocks for US Investors

          Best Of Mutual Funds Series: Passive Large US Stocks for US Investors

          Trending Tags

            • Best of
            • Reviews
            • Snapshots
            • Others
          No Result
          View All Result
          • Home
          • Investing Series Guide
            • All
            • I. Goal Based Investing
            • II. Compounding & Inflation
            • III. Assets Risks & Returns
            • IV. Efficient Diversification
            • IX. Sustainable Investing and ESG
            • V. The Investor
            • VI. Assets and Investments
            • VII. Index Funds
            • VIII. Successful Investing
            • XI. Other Topics
            Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds

            Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds

            Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it

            Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it

            Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis

            Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis

            Simple Portfolio Series (DIY) Part 2: The Traditional Portfolio 60/40, what it is, for whom, and its performance

            Simple Portfolio Series (DIY) Part 2: The Traditional Portfolio 60/40, what it is, for whom, and its performance

            Simple or Lazy Portfolio Series (DIY): Part 1 – Overview

            Simple or Lazy Portfolio Series (DIY): Part 1 – Overview

            Choosing Mutual Funds Series: Part 5 – Funds availability and currency of investment

            Choosing Mutual Funds Series: Part 5 – Funds availability and currency of investment

            Trending Tags

              • I. Goal Based Investing
              • II. Compounding & Inflation
              • III. Assets Risks & Returns
              • IV. Efficient Diversification
              • V. The Investor
              • VI. Assets and Investments
              • VIII. Successful Investing
              • IX. Sustainable Investing and ESG
              • X. Kits and Tips
              • XI. Other Topics
            • Wealth and Investing
              • All
              • Investing
              • Wealth
              The world’s best investors use different strategies, but they have in common the patience of a long-term perspective.

              The world’s best investors use different strategies, but they have in common the patience of a long-term perspective.

              The assets allocation in the world reflects the countries economic development and their financial system

              The assets allocation in the world reflects the countries economic development and their financial system

              How Women invest: Part 2 – The results are equivalent to those of men, but with significant differences in investment management

              How Women invest: Part 2 – The results are equivalent to those of men, but with significant differences in investment management

              Outlook 2023: Part 5 – 2023 will be a transitional year with two halves

              Outlook 2023: Part 5 – 2023 will be a transitional year with two halves

              Outlook 2023: Part 4 – In changing economic cycle, policies, and market sentiment, valuation matters become more than ever

              Outlook 2023: Part 4 – In changing economic cycle, policies, and market sentiment, valuation matters become more than ever

              Outlook 2023: Part 3 – 2022 was bad for investments, but was not the same for everything

              Outlook 2023: Part 3 – 2022 was bad for investments, but was not the same for everything

              Trending Tags

                • Investing
                • Wealth
              • Retirement & Savings
                • All
                • Retirement
                • Savings
                Retirement Series: How much money do we need to live through retirement?

                Retirement Series: How much money do we need to live through retirement?

                Retirement Series: Part 1 – Overview – A backwards view

                Retirement Series: Part 1 – Overview – A backwards view

                How many years do our public or social pensions last?

                What is the replacement rate of retirement pensions?

                How many years will we live in retirement?

                Planning for a good financial life in retirement

                Trending Tags

                  • Retirement
                  • Savings
                • Tools
                  • All
                  • Calculators
                  • Publications
                  • Sites and apps
                  Morningstar Rating for Funds

                  Morningstar Rating for Funds

                  Morningstar’s European Active/Passive Barometer

                  Morningstar’s European Active/Passive Barometer

                  Morningstar’s U.S. Active vs. Passive Barometer

                  Morningstar’s U.S. Active vs. Passive Barometer

                  The Power of Dividends: Past, Present, and Future, Hartford Funds, 2021

                  The Power of Dividends: Past, Present, and Future, Hartford Funds, 2021

                  OECD Corporate Governance Factbook 2021

                  OECD Corporate Governance Factbook 2021

                  G20/OECD Principles of Corporate Governance, 2015

                  G20/OECD Principles of Corporate Governance, 2015

                  Trending Tags

                  • calculators
                  • Calculators
                  • Publications
                  • Sites and apps
                • More
                  • All
                  • Best of
                  Best Of Mutual Funds Series: Dividend Stocks for Investors Outside the U.S.

                  Best Of Mutual Funds Series: Dividend Stocks for Investors Outside the U.S.

                  Best Of Mutual Funds Series: Dividend Stocks for U.S. Investors

                  Best Of Mutual Funds Series: Dividend Stocks for U.S. Investors

                  Best Of Mutual Funds Series: Investment Grade Bonds, Indexed, for Eurozone Investors

                  Best Of Mutual Funds Series: Investment Grade Bonds, Indexed, for Eurozone Investors

                  Best Of Mutual Funds Series: US Bonds, Indexed, for US Investors

                  Best Of Mutual Funds Series: US Bonds, Indexed, for US Investors

                  Best Of Mutual Funds Series: Passive, US Large Stocks, for Non-US Investors

                  Best Of Mutual Funds Series: Passive, US Large Stocks, for Non-US Investors

                  Best Of Mutual Funds Series: Passive Large US Stocks for US Investors

                  Best Of Mutual Funds Series: Passive Large US Stocks for US Investors

                  Trending Tags

                    • Best of
                    • Reviews
                    • Snapshots
                    • Others
                  No Result
                  View All Result
                  Investorpolis
                  No Result
                  View All Result
                  Home Investing Series Guide

                  Diversification of investments is one of the few free lunches in finance

                  28 de September, 2018
                  in Investing Series Guide, IV. Efficient Diversification
                  Reading Time: 8 mins read
                  0 0
                  0
                  Share on FacebookShare on Twitter

                  Diversification of investments is distributing them and combine useful and properly the 3 major assets assets: investing in stocks and bonds, and cash savings (and their main subclasses of each). Do not put all your eggs in one basket but spread them wisely

                  It is impossible to predict the performance of asset classes even in the short term

                  In terms of wealth we want growth that comes with stocks but also need preservation related to bonds; and there is a “ruler” to measure and decide on the right asset allocation

                  Tough growth is fundamental to build wealth, preservation is useful specially in times of financial market stress (or when we can´t risk much)

                  We must diversify in line with our individual objectives, investment timeframe and personal risk tolerance

                  Diversification of investments is distributing them and combine useful and properly the 3 major classes of assets: investing in stocks and bonds, and cash savings (and their main subclasses of each). Do not put all your eggs in one basket but spread them wisely

                  This is the most important rule in wealth and asset management and making either personal or institutional investments.

                  Diversification is a highly logical and rational attitude:

                  • Don’t put all your eggs in one basket
                  • Different asset classes have different benefits: cash (low return, immediate liquidity), bonds (medium return, preservation) and stocks (high return, growth)
                  • The most appropriate asset classes will depend on the term of the investment, and our financial goals have varied time horizons: safety or emergency fund, retirement, buy a home, pay for tuition of children, dream vacation, inheritance, health care, etc.
                  • It is impossible to predict the performance of investments in the very short term (otherwise we’d be rich)
                  • We want growth but also preservation, especially in times of markets stress
                  • The allocation or distribution of investments by asset classes improves the relationship between return/investment risk and determines the performance of investments in more than 90%

                  That´s why Harry Markowitz, Nobel Prize of Economics and father of the modern financial theory on investments and asset management said that diversification is the only free lunch in Finance.

                  The 3 major asset classes

                  Cash (including deposit and savings accounts) is for the very short term, have immediate liquidity, with null or even negative return in real terms, and low-risk. As they are secure, should be used to meet all the financial needs up to 2 years.

                  Investments in stocks and bonds provide higher average returns although subject to possible losses arising from the short-term financial markets fluctuations. They must be made for goals with timeframes over 2 years to dilute the short-term market fluctuations and benefit from their greater profitability.

                  The main stocks subclasses are the geography (region or country) and the size of businesses (small, medium and large).

                  The main bonds subclasses are also the geography (region or country), the nature or type and quality or the issuer’s credit rating.

                  As poupanças ou “cash” são aplicações de curtíssimo prazo e liquidez imediata, com rendibilidade nula ou mesmo negativa, em termos reais, e de baixo risco. Tendo em conta a sua segurança, devem ser usadas para suprir todas as necessidades financeiras até 2 anos.

                  It is impossible to predict the performance of asset classes even in the short term

                  The graph below shows the annual performance of 10 classes and subclasses of assets over a period of 18 years from 2000 until 2018, including: 4 of stocks, MSCI World (developed world), MSCI EAFE (developed countries ex-US), MSCI EM (emerging markets), and 500 S&P (US main index); 2 of bonds, US Treasuries (US government debt) and US Fixed Income (private debt of the US with good credit quality); 1 Cash; and 3 of other classes, REITS (real estate listed on US stock market), Commodities, and Gold.

                  Source: Asset Class Quilt of Total Returns, Bank of America Merrill Lynch

                  Source: Asset Class Quilt of Total Returns, Bank of America Merrill Lynch

                  Assets with a good performance in one year or for a few years can end up having bad performances in the following years: this is the effect of market cycles (“boom” and “bust”); e.g. real estate (REITS), commodities, emerging markets, etc.

                  Cash (3-months Treasury Bills), as well as commodities, are typically in the lower half of the table. The main stock market indexes, such as the MSCI World MSCI EAFE or S&P 500, are usually in the upper half.

                  There is no asset class consistently better in a period of 18 years.

                  Thus, it is difficult to predict the behavior of asset classes even in the short term.

                  However we can find some patterns. Note some important observations: a) the MSCI World MSCI EAFE, S&P 500, US Treasuries and US Fixed Income are usually in the middle of the table, which means that stocks and bonds are two very interesting classes (even in a period of two crises, the technology bubble and the “subprime”); b) confirms that stocks are more higher returns and more risk (wealth growth) and bonds have average returns and less risk (wealth preservation); c) cash, which is given by the performance of investment in US 3-months Treasury Bills is typically in the lower half of the table because it has very low returns.

                  In terms of wealth we want growth but also need preservation. There is a “ruler” to measure and decide on the right asset allocation

                  If we could live with average returns the choice would be easy but the truth is that we live with observed and real returns.

                  Higher returns necessarily imply higher risks at the level of each of the asset classes. Risk is the variance of returns that can produce a loss of capital in the short term. This means that there is no asset superior to the others (there’s no free lunch).

                  However, if we mix two or more asset classes, we can improve the return or the risk of the combined investment. This is one of the few free lunches in finance (along with the capitalization of income).

                  The following graph shows the spectrum of the returns of several asset combinations for the period between 1926 and 2015 in the US. This financial assets return-risk ruler should be used as a guidance to evaluate and measure our allocation decision (rational and emotional) between stocks and bonds.

                  Source: Vanguard

                  To trade-off wealth growth for preservation means to exchange average annual return of 8.1% by 4.8% per year in nominal terms, or 5% 1.8% a year in real terms, and swap best and worst annual yearly fluctuations ranges of 58.1% by 30.9% in the medium and long term, respectively.

                  https://about.vanguard.com/what-sets-vanguard-apart/principles-for-investing-success/ISGPRINC_062020_Online.pdf

                  https://advisor.mp.morningstar.com/resourceDownload?type=publicForms&id=3f9dff3c-f085-47a1-98ba-0bc008df9f25

                  Preservation is useful, especially in times of financial market stress (or when we can´t risk much)

                  The next graph shows the (24) annual periods in which stocks had negative returns in the last 90 years, between 1926 and 2016.

                  Source: Fidelity Capital Markets, Investment Themes 2017

                  In the years that stocks had losses, bonds had a positive performance. So, bonds are a good refuge and serve as a cushion in times of stress in the markets.

                  Only owning stocks is very risky specially when we need capital, we cannot emotionally handle devaluations of assets, and are forced to liquidate investments.

                  The relationship between the performance of stocks and bonds – called asset correlation – is at the technical base for asset diversification. The lower the asset correlation, that is the greater the divergence between the asset movements, the higher the diversification effect.

                  We must diversify in accordance with our individual objectives, investment timeframe and risk tolerance

                  The following graph shows the average, highest and lowest annual, and also the 15- year highest and lowest annual returns of a series of combinations of asset classes, or different degrees of risk, for the period between 1926 and 2015.

                  Source: Diversify your portfolio, Fidelity, 2016

                  The annual average return ranges from 3.42%, and 10.02%. But we should also take into account the maximum and minimum annual returns and returns of 15 years.

                  We must choose the combinations depending on the term of investment and personal risk tolerance to fluctuations of financial markets in the short term.  Generally to be very conservative is to be short-sighted and being too aggressive is to be highly adventurous. We must have risk in our investment to avoid risking our lives.

                  The goals and our emotional reactions are determining factors in this choice. The asset allocation decision is regarded as the most important and decisive in the performance of investments, accounting for more than 90% of the final outcome. 

                  Previous Post

                  YNAB

                  Next Post

                  5 Steps for better investing

                  Investadmin

                  Investadmin

                  Related Posts

                  Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds
                  Investing Series Guide

                  Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds

                  27 de March, 2023
                  Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it
                  Investing Series Guide

                  Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it

                  27 de March, 2023
                  Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis
                  Investing Series Guide

                  Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis

                  27 de March, 2023
                  Simple Portfolio Series (DIY) Part 2: The Traditional Portfolio 60/40, what it is, for whom, and its performance
                  Investing Series Guide

                  Simple Portfolio Series (DIY) Part 2: The Traditional Portfolio 60/40, what it is, for whom, and its performance

                  28 de January, 2023
                  Simple or Lazy Portfolio Series (DIY): Part 1 – Overview
                  Investing Series Guide

                  Simple or Lazy Portfolio Series (DIY): Part 1 – Overview

                  28 de January, 2023
                  Choosing Mutual Funds Series: Part 5 – Funds availability and currency of investment
                  Investing Series Guide

                  Choosing Mutual Funds Series: Part 5 – Funds availability and currency of investment

                  24 de January, 2023
                  Next Post

                  5 Steps for better investing

                  Leave a Reply

                  Your email address will not be published. Required fields are marked *

                  Trending

                  Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds

                  Choose P4 Mutual funds series – Evaluate and use the benchmarks and ratings of funds

                  27 de March, 2023
                  Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it

                  Simple Portfolios (DIY) Series Part 3: The traditional 60/40 Portfolio, the pros and cons, and how to execute it

                  27 de March, 2023
                  Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis

                  Investing in Secular Stocks Series: Part 4.1 – The 3 Valuation Methods and Fundamental Analysis

                  27 de March, 2023
                  The world’s best investors use different strategies, but they have in common the patience of a long-term perspective.

                  The world’s best investors use different strategies, but they have in common the patience of a long-term perspective.

                  23 de March, 2023
                  Investorpolis

                  We developed this blog because we believe that only a small learning effort is needed to make a big change in the decisions and results of our investments and financial assets.

                  Main categories

                  • Investing Series Guide
                  • Wealth and Investing
                  • Retirement & Savings
                  • Tools
                  • More

                  Newsletter

                  Sign to our mailing list to receive updates direct to your inbox!

                  *We don’t spam

                  • Privacy Policy
                  • Cookie Policy
                  • Contacts

                  © 2021 - Investorpolis / Powered by Delta Soluções

                  • pt-pt Português
                  • fr Français
                  • es Español
                  • en English
                  • Home
                  • Investing Series Guide
                    • I. Goal Based Investing
                    • II. Compounding & Inflation
                    • III. Assets Risks & Returns
                    • IV. Efficient Diversification
                    • IX. Sustainable Investing and ESG
                    • V. The Investor
                    • VI. Assets and Investments
                    • VII. Index Funds
                    • VIII. Successful Investing
                    • X. Kits and Tips
                    • XI. Other Topics
                  • Retirement & Savings
                    • Retirement
                    • Savings
                  • Wealth and Investing
                    • Investing
                    • Wealth
                  • Tools
                    • Calculators
                    • Publications
                    • Sites and apps
                  • More
                    • Best of
                    • Reviews
                    • Snapshots
                    • Others
                  • About us
                    • Who we are
                    • Mission
                  • Login
                  • Sign Up
                  • Cart

                  © 2021 - Investorpolis / Powered by Delta Soluções

                  Welcome Back!

                  Login to your account below

                  Forgotten Password? Sign Up

                  Create New Account!

                  Fill the forms bellow to register

                  All fields are required. Log In

                  Retrieve your password

                  Please enter your username or email address to reset your password.

                  Log In
                  We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
                  Cookie configurationCookie PolicyAcceptReject
                  Manage consent

                  Privacy Overview

                  This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
                  Advertisement
                  Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
                  Analytics
                  Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
                  Functional
                  Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
                  Necessary
                  Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
                  Others
                  Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
                  Performance
                  Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
                  SAVE & ACCEPT

                  Add New Playlist

                  Are you sure want to unlock this post?
                  Unlock left : 0
                  Are you sure want to cancel subscription?