Select Wealth Management takes a new perspective on investing with the intention of helping our clients find additional ways to diversify their investment portfolios. As part of this innovative approach, Select Wealth Management introduced The Endowment Investment Plan.
Many investment principles used to develop investment portfolios derive from one investment theory -- the capital asset pricing model. What exactly is this theory and how does it apply to your investments?
The capital asset pricing model was developed over 50 years ago by Harry Markowitz, who won a Nobel Prize for his work. His theory centers on the concept that adding an asset to a portfolio that is not highly correlated with other assets in the portfolio can reduce the portfolio's variation risk. His approach evaluated how a particular asset would impact the portfolio's risk and return.
This theory provides the underlying rationale for asset allocation. The key is that the returns of different assets do not behave in the same manner during different economic times, so adding different assets can reduce volatility in that portfolio. While the return of a diversified portfolio may be lower than that of investing solely in the best performing asset; that is typically viewed as an acceptable tradeoff for the reduced risk. Many people have also realized that it is difficult to identify the best performing asset in any given year, so a diversified portfolio provides more consistent returns. This approach assists our clients in balancing their need for returns with their need to control risk -- regardless of market conditions.
