Diversification & asset allocation

Efficiency is a goal for many in everyday life, as it helps minimise resource waste like time and energy. This principle can also be applied to your investment portfolio.

By creating a diversified portfolio with different assets that offer varying returns, you aim to maximise your overall return.
The Efficient Frontier, a cornerstone of Modern Portfolio Theory (MPT) developed by Harry Markowitz in the 1950s, plays a significant role. One of MPT’s key contributions was demonstrating the power of portfolio diversification.

The mathematics behind portfolio construction addresses the optimal allocation of asset classes to achieve efficiency. It also shows investors how expected returns change based on the level of risk taken.

Before investing, it’s crucial to understand your risk tolerance, as it will guide how you allocate assets in your portfolio. Ideally, you want to select investments that offer diversity across sectors, geographic regions, and asset types, including large, small, and mid-cap presence.

The goal is to choose a combination of investments that have a low correlation, meaning they will react differently in various market conditions.

When selecting funds, be mindful of stock duplication. If multiple funds in your portfolio hold the same underlying stocks, it can impact diversification and skew the asset allocation.

Monitoring and rebalancing: The theory also emphasises the need to regularly monitor and rebalance your portfolio to align with the desired asset allocation.

Your adviser can assist you in carefully assessing your risk tolerance, capacity for loss, objectives, and suitability. It’s crucial to maintain an updated understanding of your circumstances through a fact find, regular client reviews, and open communication about any changes

When making investment choices, there is often a trade-off between risk and reward, and Modern Portfolio Theory recognises this. So, to answer the initial question, “Yes!” – it remains relevant in today’s investment landscape.