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Why is Venture Important in a Portfolio?

Posted by Erica Duignan Minnihan on May 17, 2016 12:00:00 PM

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For high net-worth individuals with investible assets of $1 mm or more, adding venture investments to your portfolio can be a very smart move. Just as you probably counterbalance your investments in public equities with a certain amount of very stable assets, such as bonds, and cash equivalents that are intended to preserve capital but provide low returns, adding a small amount of high-risk, high-return assets can enhance the performance of your portfolio.

But you ask, how is that possible? Well it’s a little thing called portfolio theory. As you add uncorrelated assets (assets that don’t necessarily move in the same direction at the same time) to your portfolio, you tend to enhance your risk adjusted return. Which means, that for the amount of risk you are taking, you are being better compensated with the return on your investment.

For example, you may or may not prefer a portfolio that has a 90% chance of generating a 5% return over a portfolio that has a 50% chance of generating a 10% return. But you will always prefer a portfolio that has a 90% chance of generating a 10% return over a portfolio that has a 50% chance of generating a 10% return, and that is how portfolio theory works. The addition of uncorrelated assets can enhance the overall expected return while maintaining or even reducing the overall risk of the portfolio.

And venture assets help to serve this exact purpose. They are high-risk, high-return, and highly uncorrelated to the market. Added to a portfolio in reasonable quantities, (no more than 5-10%), and in a diversified manner (aim to build a portfolio of 20-30 investments over time), they can help significantly improve the overall expected return of your investments.


Topics: Venture Investing