Within a thoroughly diversified portfolio, we are able to take the risk of concentrating some of our investments in assets or companies that offer the potential for particularly attractive returns to enhance the portfolio's performance. In the broadest terms, U.S. Trust balanced portfolios include stocks, bonds, alternative investments and cash reserves. Each of these also includes important subclasses. Each asset class has unique characteristics that serve a specific purpose within a balanced portfolio. Equities, which comprise the largest portion of any balanced portfolio, are intended to serve as the primary source of capital appreciation.
Bonds are the second-largest component of most balanced portfolios.
Taxable and tax-exempt bonds are intended to serve as the primary source of current income from the portfolio, providing greater certainty of cash flow than any other asset class. Moreover, historically the predictable yields of high-quality bonds and their relatively narrow trading ranges moderate the overall volatility in a balanced portfolio. Bond prices also have a low statistical correlation to stock prices, which lowers portfolio risk. U.S. Trust's general asset allocation guidelines tend to remain consistent over time, although we do review them regularly and occasionally make slight modifications to reflect fundamental changes in market conditions. In recent years, we have recommended increasing the proportion of international equities in client portfolios as well as including alternative investments such as venture capital and real estate, in addition to the more traditional asset classes.