A Conversation with EP Wealth Advisors Director of Portfolio Strategy - Adam Phillips, CFA®, CFP®
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
What Does Standard Deviation Measure in Finance?
When you think back to math class, you may recall standard deviation as that big hump in a bell-shaped curve. As Investopedia defines the term regarding financial matters, it’s a measurement that helps reveal the historical volatility of an investment, “For example, a volatile stock has a high standard deviation, while the deviation of a standard blue-chip stock is rather low.” The role this plays in evaluating a portfolio varies based on what a client is investing in.
Beware of Bubbles
An example is setting realistic expectations during bubbles that eventually end up bursting. Think back to the tech bubble and the euphoria of imagining that anything you bought was going to be a winner—people flooded into the day’s hot investments, similar to what happened with housing in the run-up to the housing crisis. Taking the measure of such investments by calculating their standard deviation provides insights into the real risk that the volatile things that worked today and over the past few years aren’t necessarily going to be the best-performing asset or asset class over the foreseeable future.
Managing Risk in Measured Amounts
In terms of specific stocks, examples that come to mind are the FANG firms: Facebook, Amazon, Netflix and Google. Sometimes Microsoft gets included too. Because of their performance or name recognition, many people have most of their portfolios in FANG firms. However, the risk suggested by their standard deviations need to always be assessed. It’s all about managing risk so it’s not concentrated in volatile stocks, but instead well distributed so some of your holdings may zig when others zag.
How Can You Benefit from a Strategic Approach to Investing?
With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
This is #5 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Asset Allocation, Why We Diversify, How to Buy a Stock, How to Buy a Bond, Concentrated Positions, etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.
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