Investment Risk, defined as the probability that a given investment will decline in value. However, investments with higher risks generate higher returns in the long run. The key is to take the least amount of risk given the returns necessary.
Investment Correlation, defined as how closely two investments increase or decrease at the same rate. This is not causality. Very dissimilar assets can be highly correlated. Identifying true correlation is the key to reducing portfolio risk.
Investment Liquidity, defined as the ability to convert an asset into cash quickly without loss of value. Liquidity is necessary to mitigate risk and take advantage of opportunities. Investors should be paid a major premium for investments with low liquidity.
Comprehensive Diversification, defined as analysis of the correlation of all financial assets, including employment bonuses, stock options, closely-held stock, real estate, and pensions.
Traditional Asset Allocation
Example of Asset Allocation Review
Asset Allocation Analysis
Portfolio consists almost solely of equity products
Exclusive equity weighting carries tremendous risk; standard risk profile for this age group is 75% fixed income (bonds) and 25% equities (stocks)
Exclusive equity weighting is not conducive for someone taking periodic distributions
Investable Asset Allocation Analysis
Significant underweight in Large Cap
Significant underweight in Mid Cap
International represent a significant weighting of total equities
Overall: the portfolio is significantly overweighted in the most volatile stocks from a market capitalization analysis
Example of Asset Growth Projection Simulated Asset Allocation with Varying Distributions