Are You Overexposed? - Show 127

Thursday, June 19, 2014 4,393 views

In the early 1950s, Harry Markowitz applied his mathematical expertise to investing. By urging investors not to focus solely on returns of individual stocks, but to also consider the concept of risk exposure, he changed the way people invest.

Today, trillions of dollars are invested according to his principles of risk and return, known collectively as Modern Portfolio Theory. Some investors tend to avoid risk when it comes to their investments. They want returns without any risks, but avoiding all risk is the same as avoiding potential returns. A diversified portfolio that captures the right blend of market indexes avoids the type of risk associated with individual stocks and bonds. It leaves you only with the risk of the market itself, a risk that must be taken if you want market returns.

But stock-bond asset allocation is not the only aspect that goes into creating a proper risk exposure. IFA index portfolios look simple in their stock bond breakdown. But a closer look into the equity side of the portfolio reveals higher tilts toward small cap and value as the portfolio numbers increase. A passive investment advisor is equipped to match you with a portfolio. A portfolio that looks beyond a stock-bond split…to an allocation that identifies the asset classes that have provided the highest returns over the past 80 plus years. The advisor then adjusts those asset classes to match the risk exposure to your risk capacity. This process allows you to identify their expected returns and the ride you can expect while getting them.

Learn more about risk exposure in Step 11


step 11risk exposureharry markowitzmodern portfolio theoryallocation are you overexposed are you overexposed - show 127