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Portfolio Diversification Through Asset Allocation


The weighting of the various asset categories that make up a portfolio is a key component to the successful implementation of any investment strategy.

The next step of our process is to build the appropriate strategy based on your individual needs. This requires an assessment of market conditions and long-term financial market trends.

The weighting of the various asset categories that make up a portfolio is one of the most important factors in the successful implementation of any investment strategy. Spreading risk among various asset classes and investment vehicles is a classic way of increasing the security of a portfolio. The rule of thumb is that the overall risk of a portfolio is reduced as the number of different securities held in different classes in a given market is increased.

NAM manages each portfolio to avoid over-diversification, as spreading too thin dilutes the value of diversification. Furthermore, diversification should not focus solely on holdings that seem to indicate above-average potential gains (chasing performance); the stability of returns and the balanced nature of the portfolio are equally vital**.



Source: Brinson, Singer and Beebower (1991)

* A landmark study published by Brinson, Singer and Beebower in 1991 (and expanded in 1993) determined that portfolio asset allocation is the most important long-term determinant of investment results. Past performance, stock selection and timing investments in and out of the market were far less influential in achieving long-term results.
** Diversification does not insure profit or guarantee against loss.