Risk Factors

The difference in returns among portfolios is largely determined by relative exposure to the market, small cap stocks, and value stocks.  Investors who want to earn above-market returns must take higher risks in their portfolio.

Portfolio Design and discipline are the two most critical elements of a successful portfolio. There are three factors in the makeup of a portfolio that account for about 96% of its rate of return. The combination of these factors and their ongoing analysis enable us to monitor the content of the portfolio and its overall return. The risk and return of the portfolio are a direct correlation to the three factors.

The first of the three factors is that equity investments have a higher expected return than fixed income. The second factor is that small company stocks have higher expected returns than large company stocks and the third factor is that value stocks have higher expected returns than growth stocks. The diagram below illustrates two of these three risk factors and how when correlated properly, point to higher expected returns.


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