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Lessons from the 'quilt chart'
Focus on the big picture
If there's something in your portfolio that you dislike, it's a good sign it may be diversified. Nobel Laureate Harry Markowitz famously said that diversification is "the only true free lunch in investing," but the truth is that it's not entirely free: the cost is discomfort.
As you can see from the "quilt chart1" above, individual asset classes took turns being the "hero" or the "villain," but the overall performance of the moderate diversified portfolio fell somewhere in between. This is why diversification can feel uncomfortable, especially during the "good times" when your portfolio appears to be missing opportunities.
The key is to focus on the investment strategy of your whole portfolio rather than trying to fine-tune its individual pieces. By design, a well-diversified portfolio seeks to perform based on your investment objectives and risk tolerance, which can range from conservative to aggressive. It's far easier to calibrate your expectations around your long-term portfolio performance as a whole, rather than make decisions based on the randomness of individual asset classes' short-term returns.
Key Takeaways:
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Are you diversified? Have a conversation with your UBS Financial Advisor today.
Source: UBS Chief Investment Office Americas, Wealth Management; Intellectual Capital Blog; January 2018
1UBS, Bloomberg, as of 5 January 2018. Note: The Moderate Diversified Portfolio performance calculations are a hypothetical analysis based on historical asset class returns. This backward-looking illustration assumes an investment in asset class indexes represented by the Strategic Asset Allocation (SAA), as of 27 February 2017, for a moderate risk profile investor in a taxable portfolio without non-traditional assets. Performance calculations assume annual rebalancing, don't take into account any prior SAA for this investor profile, and include time periods before the SAA was created. See the latest UBS House View: Investment Strategy Guide (ISG) at ubs.com/houseview for the detailed SAA of the taxable portfolio without non-traditional assets. These calculations will not match the performance measurement published in the ISG, which reflects a monthly rebalancing. For periods prior to 2009, this illustration assumes that the Bloomberg Barclays EM Local Currency Government Total Return Index allocation (inception date of 4 July 2008) was invested fully in the Bloomberg Barclays EM USD Aggregate Total Return Index.
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