An investment portfolio is a collection of different types of investments or asset classes. Guideline’s managed investment portfolios all contain assets from a diverse group of funds, including US and international stocks and bonds, and real estate. Our portfolios differ only in the proportion of assets allocated to each class of fund, based on how aggressive or conservative they are designed to be. This strategy is used under the Modern Portfolio Theory.
Modern Portfolio Theory (MPT) assumes that any investor can maximize returns by holding a diversified portfolio of assets while taking into account their risk tolerance. A single asset’s return shouldn’t be judged alone and instead should be considered as part of the overall mix of investments in the portfolio.
MPT assumes that if one or two assets within your portfolio underperform in the short-term, this shouldn’t cause a panic because other assets in your portfolio can drive returns. As long as the portfolio is diversified, the combination of assets would be expected to perform well over the long term.
Research has indicated that the driving force for investment returns comes from asset allocation and not the actual choice of underlying securities in a portfolio. The market is difficult to beat, and those who do manage to beat it are either lucky or taking above-average risk, so asset allocation is a critical component of Guideline’s managed portfolios.