A chef would tell you that it is very important to have the right balance of ingredients while preparing a meal. An incorrect proportion or combination of spices can result in a disastrous attack on the taste buds. Creating an investment portfolio is like preparing an entrée. Each investment vehicle placed in the portfolio is like an ingredient for an entrée. The proportions of securities used to build the portfolio will define its expected risk and return.

Asset allocation and portfolio diversification are both techniques used to identify the right combination of securities to put into a portfolio. Asset allocation identifies the asset class proportions while portfolio diversification suggests the correct mix of securities within the asset classes. However, just like an entrée should be created considering the taste preferences of the person eating it, a portfolio’s diversification and asset allocation methods should be suitable to the investor’s needs.

Have you checked the ingredients of your portfolio lately? If not, give it a taste, so to speak, and make any changes that are necessary.