Patience, Diversification, And Income Remain Keys To A Balanced Portfolio

From Invesco: Fifty years ago, thanks to the lyrics and harmonies of a certain California surf rock band, I became entranced with the idea of catching waves, which to a Midwestern kid like me, sounded like the endless summer dream.

To catch a wave, surfers paddle out to a certain point in the water and wait patiently for just the right moment to catch a ride. Some waves die out early, some are steady, and every now and then you catch a really great one that makes up for all the others. However, one thing is obvious — you have to be in the water to take advantage of the opportunities.

Catching the market’s waves

If you’ve ever seen a chart of a full market cycle, it looks very much like a wave — the line curves up toward the market peak, then down to a low point, then heads back up again. For investors who are navigating these waters, two key lessons can be gleaned from surfers.

  • Patience. Surfers don’t watch for waves from the shore — they paddle into the water and wait. They would never be in the right position to catch a ride otherwise. The same is true for investors: It’s much easier to take advantage of the market’s waves if you’re already invested. Timing the market for entry and exit points is difficult at best — only in hindsight can you clearly see the pattern of peaks and troughs. Staying invested allows you to potentially benefit from unexpected market increases; with a hyperactive in-and-out trading strategy, you’re more likely to miss the opportunity.
  • Diversification. Not all waves are alike — and neither are all surfboards. When the waves are bigger, shortboards facilitate quick turns and maneuvers. When the waves are flatter, longboards provide enough stability to enable a smooth ride. Dedicated surfers don’t own just one board — that would limit where and when they could surf. Diversification of investment opportunities by asset class and other factors can help equip your portfolio to perform in different types of market environments.

Diversifying your portfolio

The principals of patience and diversification may best be illustrated by endowments. Endowment funds are designed to be sustainable, multi-generational sources of money for charitable or nonprofit organizations — think universities and museums, for example. They are typically invested in very well-diversified portfolios across traditional and alternative asset classes, and they generally seek to provide sustainable, long-term results by earning interest on investments, maintaining the potential for capital gains and preserving principal.

Those goals really aren’t much different than the goals investors have for their own retirement accounts. A properly designed mix of investments depends on each individual. But there are several solid choices that — when combined — could help contribute to asset diversification, risk reduction, lower correlation and diversified income sources:

  • Equities, including US, foreign, emerging markets and private equity
  • Fixed income, including corporate, government and foreign
  • Preferred or convertible securities
  • Alternative assets, such as real estate, commodities, infrastructure and master limited partnerships (MLPs)
  • Alternative strategies, such as market neutral funds, that can be used to diversify a portfolio

Get your boards in the water

I can hardly believe that the seminal album from the wave-catching, harmonizing band of my youth is now 50 years old, and is being celebrated this year with a world tour. Clearly, this music has withstood the test of time. In my view, classic investment principals such as patience and diversification are timeless as well.

Your financial advisor can design, implement and maintain an individualized investment plan that incorporates these principles, and can potentially help you enjoy a more comfortable, dependable lifestyle during your retirement years. Just like the surfers can’t predict the weather or the waves, markets will always fluctuate, but your overall investment mix can potentially generate the type of income and gains necessary to sustain your lifestyle.

Investors with adequate exposure to equity and fixed income may want to consider additional diversification. Invesco Unit Trusts offers many choices to explore, including:

The PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSE:SPHD) was trading at $39.46 per share on Wednesday afternoon, down $0.09 (-0.23%). Year-to-date, SPHD has gained 0.71%, versus a 6.01% rise in the benchmark S&P 500 index during the same period.

SPHD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #54 of 75 ETFs in the Large Cap Value ETFs category.

Important information

Correlation is the degree to which two investments have historically moved in relation to each other.

Private equity strategies invest in companies that are not publicly quoted on a stock exchange.

Preferred stock is class of ownership in a corporation that has a higher claim on its assets and earnings than common stock.

A convertible security is an investment that can be changed into another form, such as convertible bonds that can be changed into common stock.

A master limited partnership (MLP) is a publicly traded limited partnership in which the limited partner provides capital and receives periodic income distributions from the MLP’s cash flow and the general partner manages the MLP’s affairs and receives compensation linked to its performance.

About risk

Market neutral strategies use offsetting long and short stock positions in an attempt to limit nonstock-specific risk.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Alternative investment products, including hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees that may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for hedge funds and private equity, and none is expected to develop. There may be restrictions on transferring interests in such investments.

Preferred securities may include provisions that permit the issuer to defer or omit distributions for a certain period of time, and reporting the distribution for tax purposes may be required, even though the income may not have been received. Further, preferred securities may lose substantial value due to the omission or deferment of dividend payments.

Convertible securities may be affected by market interest rates, issuer default, the value of the underlying stock or the right of the issuer to buy back the convertible securities.

Investments in real-estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies, and their shares may be more volatile and less liquid.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject to the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs, which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments.

There is no assurance that a UIT will achieve its investment objective. An investment in this unmanaged UIT is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what you paid for them. Accordingly, you can lose money investing in this trust.

The trusts listed are subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in each trust.

This article is brought to you courtesy of Invesco.