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Jim Corbett
Chief Operations Officer
Wintrust Investments

If you were to peer into the tool box of an auto mechanic, you would see a wondrous range of tools that come in all shapes and sizes. This variety is necessary because the mechanic is expected to fix a variety of cars—all with different equipment and specifications; this means a diverse tool box is a must for a successful mechanic.

The same can be said for a successful investor. Looking across the financial landscape, there are investments of all shapes and sizes that are grouped into asset classes. Domestic and foreign stocks, bonds issued by municipalities and federal governments both at home and abroad, commodities such as gold and oil, and real estate make up a short list of asset classes available in today’s markets. Each of these investments has certain characteristics that make them unique, and thus they react to changing market conditions differently. This is the basis for what is referred to as Modern Portfolio Theory.

Modern Portfolio Theory suggests that an understanding of how these various asset classes react to changing market conditions is key to successful portfolio construction. Mathematical analysis leads to what is referred to as a “correlation,” or the extent to which two asset classes move in the same direction as market conditions change. Two asset classes with negative correlations will move in opposite directions, and asset classes with positive correlations will move in the same direction. When building a properly diversified portfolio, professionals will combine asset classes with low correlations to reduce risk and improve the chances of overall positive returns. The amount of a portfolio that is invested into each asset class is generally based on the client’s risk tolerance and investment objective.

Our Financial Advisors have the tools to fix portfolios for proper diversification and can help repair your investments by reallocating to asset classes with low correlations. Contact one today.