Checking In on Risk Factor Diversification

This article is relevant to financial professionals who are considering offering Model Portfolios to their clients. If you are an individual investor interested in WisdomTree ETF Model Portfolios, please inquire with your financial professional. Not all financial professionals have access to these Model Portfolios.

If you are a regular reader of WisdomTree blog posts, you know how seriously we take factor diversification in the construction of our Model Portfolios.

Almost everyone understands and agrees on the importance of asset allocation—that is, diversifying a portfolio across multiple asset classes to improve the consistency and risk-adjusted performance potential of the portfolio. And many are very familiar with the “asset class quilt chart,” which illustrates just how difficult it can be to predict which asset classes will perform best and how diversifying may offer a more consistent performance.

Why does consistency of performance matter? Let’s remind ourselves of the power of compounding—if you don’t lose as much in down markets, you don’t need to gain as much in up markets to still come out ahead.