Today’s investment landscape has so many choices. There are over 10,000 Mutual funds worldwide – more than enough to make your head spin. So how do you make an informed decision? The below three items were taken into account for how we invest for our clients, and believe it or not – our own accounts.

Diversification

Back in the day, Mom and Dad would advise their children “Don’t keep all your eggs in one basket.” If the basket falls, all the eggs are lost. It is the same with investments. Let’s assume you invest $1,000 in one stock. If that company goes under in 3 years, you are left with nothing – zip – zero – nada.

Now, let’s assume you split up your investment over ten companies. The company that went under is also one of the ten. In all, one company goes broke, some go up, and a couple go down. In this hypothetical example, you are left with $1,045. More than you started with! How is that possible?

Diversification among investments reduces risk. As you can see, even though one stock lost all of its value, the average of all the others smoothed out the total returns.

The flip side is that if you had one stock which went up a significant amount, your total portfolio would not go up as aggressively. Our passion for reducing risk vastly outweighs taking chances.

 

Asset Allocation

Asset Allocation refers to figuring out which types of investments should be in your portfolio and how much of each one you need. The concept is very similar to baking a cake.

Below is a chocolate cake recipe with equal quantities of all ingredients.

• 1 cup sugar
• 1 cup flour
• 1 cup cocoa
• 1 cup baking powder
• 1 cup baking soda
• 1 cup salt
• 1 cup eggs
• 1 cup milk
• 1 cup vegetable oil
• 1 cup vanilla extract
• 1 cup boiling water

What kind of a cake would that concoction make? The answer is – no cake. It would be a blob of ingredients that would not look, smell, or taste good.

Let’s now take a real chocolate cake recipe:

• 2 cups sugar
• 1-3/4 cups all-purpose flour
• 3/4 cup cocoa
• 1-1/2 teaspoons baking powder
• 1-1/2 teaspoons baking soda
• 1 teaspoon salt
• 2 eggs
• 1 cup milk
• 1/2 cup vegetable oil
• 2 teaspoons vanilla extract
• 1 cup boiling water

There’s a significant amount of sugar and flour, while there are just a few teaspoons of other ingredients. This mixture creates a decadent chocolate cake.

Again, in the investing world, your asset allocation can make or break your investing goals. There are some asset classes you may have to stock up on (pun intended) and others that are essential in small quantities.

 

Money Managers

Money Managers are people and companies who specialize in managing certain types of investments. Each one has his/her forte and they specialize in a certain type of management.

If you were building a home, would you pick one person to build the whole thing? They would have to know how to draw up plans, pour the foundation, frame the house, do the plumbing, run the vent ducts, pull electricity throughout, lay the roof, etc. Can one person be the best at all of these tasks? Finding one person who would do everything would be difficult and unreasonable.

You would hire the below list:

• Architect
• Concrete company
• Framing contractor
• HVAC
• Plumber
• Electrician
• Roofer
• Etc.

The same goes with money managers – each one is specialized in their type of investing. Each one has their strong suits to optimize returns and manage risk.

 

Diversification, Asset Allocation, Money Managers, oh my!

How do investors make sense of all these factors? Some people have a hard time picking what they’d like for lunch, let alone investments. That’s where our strategy and 25 year relationship with Russell Investments comes in. Russell does not pay us a commission – we work with them because of their unique strategies and longstanding reputation.

If you had one of the best investments in the world – don’t you think people would flock to it? Russell’s clients include Mercedes-Benz, Boeing, Toshiba, Coca-Cola and many others. Why do they work with Russell?

If you want to see the technical details and how they relate to the above concepts, read this article “The Technical Details – How We Invest for Clients”.

There’s a saying that if you miss the 10 best days in the market over the course of 15 years you would make nothing – $0.00 on your investment. What if tomorrow was one of those days? Would you be ready to take advantage of it?

Want to learn more? Your first meeting is complimentary and strictly informational – no sales pressure.

Martin Konsor
Woodfield Financial Advisors

847-726-9600