9 Lowell Street, Beverly, Massachusetts, 0915-3652 - Phone 978.922.9961 - Fax 978.922-9961
Conflict Free Financial Planning, Investment Counseling & Financial Education
Asset Allocation
Category
Diversification


Security
Diversification


Time Based
Diversification
9 Lowell Street, Beverly, Massachusetts, 0915-3652 - Phone 978.922.9961 - Fax 978.922-9961
Conflict Free Financial Planning, Investment Counseling & Financial Education
Asset Allocation
Category
Diversification


Security
Diversification


Time Based
Diversification
9 Lowell Street, Beverly, Massachusetts, 0915-3652 - Phone 978.922.9961 - Fax 978.922-9961
Conflict Free Financial Planning, Investment Counseling & Financial Education
Philosophy

                                                           Category Diversification

The second step in controlling investment risk is category diversification. Once you have decided how much of
your portfolio to invest in stocks, bonds and money market securities you must decide which types of these
broad categories of investments to include in your portfolio.                                     

There are many categories to choose from. Stocks are grouped into categories based on the geographic
location of the company, the size of the company, how rapidly a company’s profits are growing and how high
their dividends are. These categories include U.S. stocks and foreign stocks, large-cap stocks, mid-cap
stocks and small-cap stocks, growth stocks and value stocks. Over the long term all broadly diversified
categories of stocks will generate similar returns while over shorter periods of time their returns can be quite
different. There will be times when U.S. stocks generate higher returns than foreign stocks and vice versa.
Similarly, at times the stocks of large companies will out-perform the stocks of small companies and other times
when the reverse is true. Concentrating your portfolio in just one or two categories exposes your portfolio to too
much volatility as the categories you choose could under perform the others for a significant period of time. A
broadly diversified equity portfolio with exposure to all of these categories will never be concentrated in a
category that is under performing.

Bonds are categorized based on the type of issuer, maturity and credit quality. Categories based on the
issuer include U.S. Treasury bonds, municipal bonds and corporate bonds. Categories based on maturity
include long term, intermediate term and short term bonds. Investment grade bonds and junk bonds are
examples of categories based on the credit quality of the bond. Each of these categories exposes investors to
different risks and potential returns. Which categories are appropriate are a function of the investors required
rate of return, holding period and risk profile.

Once we have developed a basic asset allocation for your portfolio among stocks, bonds and money market
securities we diversify your holdings within these categories to lower risk and increase potential returns.   
9 Lowell Street, Beverly, Massachusetts, 01915-3652 - Phone 978.922.9961 - Fax 978.922.9961
Conflict Free Financial Planning, Investment Counseling & Financial Education
Adam Smith                                                                                                                                                                               David Ricardo
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