A Diverse Portfolio

Timothy Plett
Vice President




Everyone has heard the saying, "don't put all your eggs into one basket." Just like a recipe to a dessert, building a portfolio should contain ingredients with respective quantities. The analogy of baking a pie can be used here. Your pie is supposed to have the following:

• 1 recipe pastry for a 9 inch double crust pie
• 1/2 cup unsalted butter
• 3 tablespoons all-purpose flour
• 1/2 cup white sugar
• 1/2 cup packed brown sugar
• 1/4 cup water
• 8 Granny Smith apples - peeled, cored and sliced

Lets say you felt that you did not need the ¼ cup of water and you continue to bake your pie at the recommended temperature and time.  The timer goes off and upon removing the pie you noticed it has burnt and you find yourself asking, “Why did this happen when I did everything right?”  Well you made a mistake that investors make every day, that is by ignoring the water ingredient you left out a significant part of your successful pie.  The same thing can be represented in any person’s portfolio.  Like baking a pie, all the right ingredients in the correct quantities are needed. When building an investment portfolio imagine yourself making  your pie. Your pie should first reflect your strategy.  This means that a person who is a baby boomer may have a different investment strategy compared to a 25 year old college graduate.  Here is a look at what a diverse investment portfolio should look like:

As you can see the portfolio reflects a 70/30 ratio.  This obviously is not a Gold Standard for any portfolio.  This is a basic example of what diversification can and may look like.

It is wise to keep a portfolio that you can understand and believe in.  The lack of understanding is the biggest reason for failure in the stock market.  This means constant research and studies on organizations you feel carry a value to your fund is needed. Some investors do not believe in putting more than 10% of investments into one vehicle.  Like the picture above, int’l Large Cap Blend takes up 28% of the portfolio which in this case plays a very significant role.  This could be because the person who owns this portfolio may have a very good understanding of international markets and investments.  It is wise to invest in markets you have a good understanding in and of course you must enjoy it.

For those who feel the need to invest but do not have the time and resources to give to research and studying of markets a mutual fund may be a direction for you.  A mutual fund is a balance of several investments which pools together a group of investors to a diversified portfolio with a large sum.  An example of this is a Vanguard Mutual Fund.  Vanguard owns $1.4 trillion in assets and is a leader in collective investment schemes in the US.  This is a safe vehicle to investors with lower risk and low research requirements.  Mutual funds serve several benefits like:  diversification, economies of scale, liquidity, divisibility, and professional management.  These appeal to the simple investor looking to play in the market without having to put in a large amount of time.  Of course there is going to be fees and expenses paid out to the fund managers which could play as a set-back.  Generally organizations will charge 1-2% and sometimes sales charges as well.  These obviously would not be paid in one’s own managed fund.

Whether creating your own pie of investments or paying someone else to make one for you, the investment portfolio must be well balanced and created on a foundation that matches your own goals and needs.