According to modern portfolio theory, investors can maximize their return and reduce their risk by combining investments in asset classes that are not correlated with one another. The less correlated your investments are, the more diversified your portfolio is. If you are using My Portfolio to track investments, the Diversification Analyzer tab displays pie charts and analysis to show you how diversified your portfolio is.
The Diversification Analyzer is exclusive to A+ Investor subscribers. It is located on the right side of the My Portfolio tabs when viewing a portfolio.
The Asset Allocation Analyzer breaks down your portfolio’s holdings into five broad asset classes: domestic stock, foreign stock, bonds, cash and other. AAII has three broad asset allocation models for you to compare your portfolio to: conservative, moderate or aggressive. In the Asset Allocation Analyzer box, select which kind of investor you think you are closest to in terms of risk tolerance by hitting the Edit button. The analyzer will compare how your portfolio matches your chosen asset allocation.
The diversification benefits of holding a collection of dissimilar assets are tied to how the investments are correlated with each other. A combination of investments that are not highly correlated to each other should do reasonably well in a variety of economic and market environments because as one asset is falling, another is likely rising.
Depending on the amount of risk you want your portfolio to adhere to, the allocation analyzer shows how much your current allocation differs from the suggested allocation. When you are overweight in an asset class relative to the suggested allocation, the difference is shown in red, while green indicates an underweighting. This tool is useful because it offers you insight into whether you are taking on too much or too little risk, given your tolerance level.
As you progress toward and through retirement, your investment needs will change along with your investment horizon. You can use the Asset Allocation Analyzer to assist you in modifying your portfolio as you manage it. Different allocations are based on the different investment needs you will likely have as you age or make plans for the present and future.
Assets are usually moved away from riskier allocations favoring individual stocks and stock funds in order to preserve the wealth that is needed to fund retirement or expenditures such as a new home or a child’s education.
The Sector Diversification, Size Diversification and Geographical Diversification analyzers in My Portfolio break down your portfolio across individual stocks and the equity portions of any mutual funds or exchange-traded funds (ETFs) in your portfolio. It does not consider bonds.
These tables and charts offer a quick visual reference for your portfolio’s exposure points. If you change your portfolio to align with a different asset allocation and risk tolerance, you can track the diversification changes here. Before making actual portfolio changes, the My Portfolio tools allow you to see the hypothetical impacts of your decisions.
