Jun 03
Examine the Whole Instead of the Parts
“Focus on the behavior of your portfolio, not on its constituent parts” writes William Bernstein. While it is important to look for portfolio parts that provide portfolio diversity, it is the whole that is most important. That is why we examine the projected annualized return and risk, as well as the portfolio diversification percentage after putting the pieces together. We are interested in how all the parts fit so as to produce a well-diversified portfolio that has a high probability of meeting our return needs while not taking on undue risk.
Since our goal is to outperform Vanguard’s Total Stock Market Index Fund, the VTSMX, we can put together a set of ETFs knowing some will disappoint at times but be carried by other asset classes. Overall, the damage to the portfolio is minimized. Keep in mind that it is possible to put together a portfolio of 20 to 30 individual stocks and operate under the illusion the portfolio is diversified. It may well be diversified and then again, it might not meet a high Diversification Metric (DM) percentage. One needs to analyze what goes into the makeup of the portfolio to know what is going one. Intuition does not always cut it.
Lowell Herr
Photograph: San Antonio River Walk
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