properly diversified portfolio will likely bring
in a double-digit return
despite prevailing market conditions. They also agree that in the worst case
situation will be simply a general decrease in the value of the different
assets. Yet with
all this information out there, very few investors are
actually able to achieve portfolio diversification.
So why are investors unable to simply
diversify their portfolios
appropriately? The answers are varied and diverse. The challenges
encountered by investors in diversification
include weighting imbalance,
hidden correlation, underlying devaluation, and false returns, among others.
While these challenges sound rather technical, they can easily be solved.
The solution is also rather simple. By hacking these challenges, an investor
will then be able to benefit from an aptly diversified platform.
The Process of Asset Class Allocation
There are different ways of allocating investments to assets. According to
studies, most investors, including
professional investors, portfolio
managers, and seasoned traders actually rarely beat the indexes within their
preferred asset class. It is also important to
note that there is a visible
correlation between the performance of an underlying asset class and the
returns that an investor receives. In general, professional investors tend to
perform more or less the same as an index within the same class asset.
Investment returns from a diversified portfolio can generally be expected to
closely imitate the related asset class. Therefore,
asset class choice is
considered an extremely crucial aspect of an investment. In fact, it is the
single more crucial aspect for the success of a particular asset class. Other
factors, such as individual asset
selection and market timing, only
contribute about 6% of the variance in investment outcomes.
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