This mistake is an explicit case in point of portfolio disparity. A huge amount of total portfolio assets are determined in funds with very high risk/reward characteristics, even though the fund types may actually imitate selected investment objectives. The result is extreme instability in the price movement of these funds, which, in many cases cause poor performance of portfolio as very large proportion of risk does not justify the potential reward -- in other words, the risk is highly unequal to overall profit potential. Over-weighting can occur with any type of risk tolerance, even though this specific type of over-weighting is more likely to be a problem in portfolios with aggressive risk tolerances.
High-risk, non-diversified stock fund categories include domestic and foreign small-cap growth, emerging markets and sector funds; in bond categories, emerging market and certain high-yield funds are also high risk. These fund types can be appropriate in many portfolios, provided an investor adheres to the principles of effective diversification: distinct risk/reward objectives within a variety of fund types and a reduction in overall portfolio risk.
Are there any acceptable percentages of high-risk, non-diversified funds to own in a portfolio? Most guidelines suggest between 5-30% of total portfolio assets, depending upon the choices of aggressive, moderate or conservative risk tolerances and growth, balance or income-oriented return objectives. The key is to treat high risk, non-diversified mutual funds as a suitable portfolio supplement without dramatically increasing overall risk.
High-risk, non-diversified stock fund categories include domestic and foreign small-cap growth, emerging markets and sector funds; in bond categories, emerging market and certain high-yield funds are also high risk. These fund types can be appropriate in many portfolios, provided an investor adheres to the principles of effective diversification: distinct risk/reward objectives within a variety of fund types and a reduction in overall portfolio risk.
Are there any acceptable percentages of high-risk, non-diversified funds to own in a portfolio? Most guidelines suggest between 5-30% of total portfolio assets, depending upon the choices of aggressive, moderate or conservative risk tolerances and growth, balance or income-oriented return objectives. The key is to treat high risk, non-diversified mutual funds as a suitable portfolio supplement without dramatically increasing overall risk.
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