The market was great this month and this quarter. Everyone is way up. Last month (May) being down did not matter.
An essential part of portfolio management concerns asset allocation. In a portfolio we have stocks, stock mutual funds, real estate mutual funds, cash, and bond mutual funds. Essentially the parts are stocks, real estate, and fixed income. In this newsletter, we will explain why we utilize multiple asset types in our portfolios.
Multiple types of assets are used for the purpose of risk management. One concept that is used in finance is diversification. If you own multiple types of assets, then the damage caused by the collapse of one of them is somewhat mitigated. The reason is that each asset type moves differently and has unique characteristics. Just because one of them fails, doesn’t mean the others will fail.
Stocks and real estate historically have provided a very large return. Stocks are ownership shares of large companies. Thus, as the economy grows, stocks tend to become more valuable. Real estate is ownership of things such as land and buildings. Thus, as the population grows, real estate tends to become more valuable. Throughout history many fortunes have been built relying on these two asset types. It is unlikely that a disaster will befall both asset types simultaneously. However, occasionally systemic failure can still occur. That is the reason why we have fixed income in our portfolios. The return provided by fixed income is not large, but this asset type is extremely unlikely to collapse if there is a problem with both of the other asset type types. The only way for fixed income to collapse is if the issuing body decided to default on their debt. With highly rated bonds and bond funds, default is exceptionally unlikely. The low return is thus counterbalanced by the extremely low risk. We choose to use bonds instead of keeping things in cash because the return on cash is effectively zero (taking inflation into account), and low return is better than no return.
In a portfolio, there tends to be a lot of noise and chaos as the various moving parts operate. The inclusion of fixed income reduces that noise and chaos as that fixed income is not going to respond and move as severely as stocks and real estate. Having a smoother portfolio return is often of great psychological comfort to many investors.
If you have any questions about your investments, please call at any time. We sincerely hope you got value from this newsletter.
We appreciate your business and trust.
Thank-You
Dan and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
E-Book Download
Questions for the comments
Did the newsletter make sense? Do you agree or disagree with what we said?
Learn About Our Business
