You can own a collection of excellent, low-cost funds, but if you don't assemble a good portfolio with them, you're only winning part of the battle. This issue, which Don Phillips examined in a recent column, has been compounded in recent years by the attention paid to the so-called active/passive debate, which puts fund selection front and center and distracts attention from the "real roadblock" that investors face--assembling better portfolios.
What's in a 'Good' Portfolio?
Many readers are no doubt familiar with the concept in modern portfolio theory called the "efficient frontier," which is the imaginary line that represents the combination of assets in a portfolio that will achieve the best possible return for the lowest level of risk, as measured by standard deviation. (If you envision risk on the x-axis, and return on the y-axis, the efficient frontier is an upward sloping line that represents the best combination of risk/return.) Every portfolio plotted below the line achieved an inferior return for the same amount of risk, or the same return with more risk.
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Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.