Keys To Successful Investing

At ElderAdo Financial our goal is to help you understand the three keys to successful investing. The keys to successful investing include proper diversification, an accurate assessment of one’s risk tolerance, and proper 

determination of the appropriate asset allocation. Here’s why:

Diversification: 

The goal of proper diversification is to reduce risk while increasing the overall return. 

This is done by investing in different asset classes which do not exhibit similar characteristics.

When two investments behave in a like manner and have similar total return patterns over time, they are said to be positively correlated. Two positively correlated investments will provide you with little or no diversification, and add to investment risk. By combining investments in asset classes that do not move in tandem, you will usually lower the overall volatility of your portfolio. Broad diversification across investments and within asset classes helps reduce volatility and increase potential return.

Risk Tolerance: 

At ElderAdo Financial, we understand that each investor has their own comfort level, and that level of comfort determines the level of risk that they are willing to accept in the market.

Risk is generally defined as the degree of volatility, or standard deviation, in a portfolio. We do a careful risk tolerance assessment to determine the appropriate risk level for each client and to create a portfolio in line with their personal comfort level.

Asset Allocation: 

Asset allocation is a time-tested strategy that can help diversify your portfolio across key asset categories, such as stocks, bonds and cash or cash equivalents. By investing in a combination of asset classes, this strategy can help balance risk while seeking to provide competitive returns.

In 1990, Dr. Harry Markowitz of the University of Chicago won a Nobel Prize for his study which discovered that proper asset allocation is the single most important factor in determining overall portfolio performance—more important even than which securities you own, or when you decide to buy and sell them. The study concluded that the range of returns investors experienced followed a pattern and, at any given level of risk that an investor was willing to assume, there was a certain combination of asset classes that maximized their investment returns over time.

This discovery led to a concept called the "efficient frontier". This is the point at any particular risk level where the percentages within each asset class (stocks, bonds, cash, etc.) are at the optimum, or most efficient, producing the highest returns for that level of risk. Modern Portfolio Theory says that an investment portfolio not on the efficient frontier is considered to be an inefficient portfolio, meaning that a different combination of asset classes would have performed better for the same amount of risk!