The Short Answer

The Best Way to Diversify Equity Risk

Karen Wallace

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. 

Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.

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