## Highlights from the meetup discussion on diversified portfolio construction

We had an amazing meetup on "How to build diversified portfolios?" The attendees were mesmerized by the presentation and the facilities coordinator had to remind us that the building will be closing in 5 minutes or else we would have continued our discussion further. Some of the highlights from the presentation I took away with me were as follows:

* Diversification helps in reducing portfolio risk and drawdowns.*

An all stock portfolio over a 30 year period (Jan 1987 to Sep 2015) beat all other portfolios (other contenders in the race were equal weighted and ERC, more on that later).

An ERC portfolio considered was an Equal Risk Weighted portfolio of VFINX:22, VTRIX:21, VUSTX:57. This consists of asset classes US Stocks, Foreign Developed Stocks, and Govt Bonds.

Equal weighted naive portfolio of these same asset classes did not do as bad as one would have expected. The CAGR for this was 8.11 % compared to a CAGR of 8.25 for ERC. Of course all stock portfolio's CAGR of 9.78 % was the winner !

So where is the catch?

As we know there are no free lunches in investing! So the catch or the trade off was in final highest return vs. volatility. If you were in an all stock portfolio over this period your $100,000 of investment in Jan 1987 would have ended up with $1,462,341 in Sep 2015. Compare this to the numbers for equal weighted and equal risk portfolios, which ended up with $941,478 and $976,913 respectively. But the volatility of all stock portfolio was a killer. It had a worst year return of -37.02 % and a max drawdown of -50.97 %. Compare this to ERC portfolio which had a worst year return of -6.30 % and a max drawdown of -17.70 %. So if someone who invested in an all stock portfolio needed money at the "wrong time", they would not have been very pleased with the outcome. ERC portfolio smoothed out the volatility in the good and bad times, but of course the trade off was that it ended up with lower overall value at the end.

To summarize, I would say it was a very interesting meetup and I enjoyed it as much as other participants did. I hope the next meetup where we get to see the perspective of an investment industry professional is equally interesting.