A six-point checkup for diversification.
By
Amy C. Arnott |
01-11-05 |
01:46 PM |
E-mail Article
When the market is in a bullish mood, it's easy to lose sight of the value of diversification. During the market runup in 2003, for example, investors would have reaped ample rewards by concentrating their portfolios in small-growth stocks, which surged ahead of other areas of the market. But you don't have to look back too far to see a much different market environment. Tempering your portfolio with bonds and large-value stocks would have helped buffer losses in the bear market from 2000 to 2002. Small-growth stocks, on the other hand, suffered double-digit losses in each of those three years.
About the Author
Amy C. Arnott, CFA, is director of securities analysis for Morningstar.
Action Plan
1) First, take a few minutes to enter your portfolio in Morningstar.com's
Instant X-Ray. Simply type in the ticker and value for each of your holdings and click "Show Instant X-Ray." Under Asset Allocation, you'll see a breakdown of your whole portfolio showing the percentage invested in foreign stocks, domestic stocks, and other asset classes.
2) Next, scan the style box diversification section on the right side of the screen. Although it's not necessary to have exposure to every square in the style box grid, most investors will probably want some exposure to both growth and value stocks, as well as some exposure to both large- and small-cap issues. If your portfolio does show a pronounced tilt toward growth or value, make sure you're comfortable with where the concentration lies. For example, if your portfolio is heavily value-oriented, you shouldn't expect chart-topping returns when growth investing is in vogue.
3) Then, check out the stock sector breakdown on the left side of the page. You'll see the percentage of your portfolio invested in each of Morningstar's 12 sectors, as well as comparable numbers for the S&P 500. Again, check for any major overweightings and make sure you're comfortable with the bets you're making on particular sectors.
4) On the right side of the page, you'll see a breakdown of your holdings by stock type, which can also influence your portfolio's performance. So far this year, cyclical and aggressive-growth stocks have generally fared best, while speculative-growth and distressed stocks have posted lower returns.
5) Below the Stock Type section, you'll see a breakdown of your portfolio by world region. Even if you own mostly domestic-stock funds, you might find you already have some international diversification if the fund managers have bought a few foreign stocks for their portfolios.
6) Scroll back to the top of Instant X-Ray and you'll see a link labeled "Save Instant X-Ray holdings as a portfolio." Click on it to save your entries for future review in Portfolio Manager, which features seven different tracking views.
Learn More: Readings
Top 10 Portfolio Pitfallsby Sue Stevens
Using Inflation-Indexed Bonds in Your Portfolioby Sue Stevens
Streamlining Your Portfolioby Sue Stevens
Investing Classroom, Funds 301: Why Diversify?by Morningstar Analysts
The Facts on Funds of Fundsby Emily Hall
An Index-Only Portfolio? by Emily Hall
Perplexing Portfolio Issues Explained by Sue Stevens
Model Portfolios for Retireesby Sue Stevens
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