International stocks. U.S. small-cap stocks. Real estate. Alternative investments and commodities. Do these investments sound risky to you? In and of themselves, each of these asset classes is volatile that is, subject to a relatively wide variation of returns. However, when these risky investments are combined with more conservative investments for example, U.S. large-cap stocks and fixed incomethe result is a portfolio that, as a whole, can be less risky.

Nobel laureate Harry Markowitzs economics work asserted that portfolio risk* falls when certain risky asset classes are combined with more conservative asset classes, if the return patterns are less than perfectly correlated. Risky asset classes like U.S. small-cap equity and international equity have higher expected returns, but also have higher expected risk compared to cash and high-quality fixed income assets. A smoother portfolio result can potentially be accomplished by combining these asset classes of varying volatility. An example of the benefits of properly combining certain asset classes is illustrated in the graph below. Line A illustrates the broad performance variations of an index of commodities over 10 years. Line B illustrates the narrow 10-year performance variations of a high-quality fixed income index. Line C combines the two relatively diverse asset classes in 50-50 weightings. This last line shows how portfolio volatility could have been reduced by utilizing a combination of two asset classes with different variations of return.

Selecting asset classes properly lies at the foundation of a long-term investment philosophy. Portfolios designed utilizing this philosophy may help you achieve the long-term return objectives that are in line with your investor profile, whether ultra-conservative, conservative, moderate, growth or aggressive growth. A sensible investment strategy can help protect your investments from the brunt of market fluctuations. Having an asset allocation strategy and a properly diversified portfolio will help you stay the course over the long term, regardless of short-term market behavior and economic and political swings. Investment discipline and proper portfolio structure are key tools to help protect your current and future lifestyle.
 

*As measured by variation of returns around average performance. Past performance is no guarantee of future results. The above-listed indexes are unmanaged. It is not possible to invest directly in an index. Each investors portfolio must be constructed based on the individuals financial resources, investment goals, risk tolerance, investing time horizon, tax situation and other relevant factors. Diversification of your overall investment portfolio does not assure a profit or protect against a loss in declining markets. Investing in micro, small or mid-sized companies involves risks not associated with investing in more established companies. Since equity securities of small companies may not be traded as often as equity securities of larger, more established companies, it may be difficult or impossible to sell. Investing in emerging markets involves greater risk than investing in more established markets. Such risks include exchange rate changes, political and economic upheaval, the relative lack of information about these companies, relatively low market liquidity, and the potential lack of strict financial and accounting controls and standards.