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Step 4 - Diversify fully within financial investment asset classes
Category : Financial Planning -- 10 Personal Steps in the Right Direction
fully within asset classes
Step 4 of
10 Financial Planning Steps in the Right Direction
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OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT
Diversification is genuinely an investment
“free lunch,” and it is a key contributor to
investment risk management.
has become an axiom of
personal investing, because the specific risks of businesses and other
investment entities can be reduced or eliminated from a portfolio
without reducing expected returns.
A highly diversified portfolio is an absolute investment
Increased diversification reduces portfolio risk without a
corresponding reduction in expected portfolio returns. Diversification
is genuinely an investment “free lunch,” and it is
contributor to improved investment risk management. (See: Why is diversification valuable to individual
investors? and What is the cost to individual investors of
sub-optimal portfolio diversification?)
Diversification has become an axiom of personal investing,
the specific risks of businesses and other investment entities can be
reduced or eliminated from a portfolio without reducing expected
Through investments in
broad-based index mutual funds and
exchange-traded funds, diversification is relatively easy and
inexpensive to achieve. Attempting to become broadly diversified
through the self-assembly of a portfolio of a large number of
individual securities is far more difficult and costly. Portfolio
self-assembly is more likely to result in higher risk with returns that
lag the market.
A significant portion of a portfolio may sometimes become
concentrated in a single investment, which dramatically increases the
overall risk of a personal portfolio. While generally undesirable,
there sometimes are unavoidable reasons for investment concentration,
such as owning a private business or being a key member of the
management team who is constrained by an employment agreement with the
company. In such circumstances, he should seek expert guidance on
possible ways to mitigate the associated risk.
However, for 99+% of investors there is absolutely no good
maintain a high level of concentration in an individual security.
Immediate steps should be taken to reduce the exposure. How many failed
public companies like Enron and WorldCom do investors need to see crash
and burn, before they realize that excessive concentration does not pay
and can lead to significant personal financial peril?
these other investment portfolio diversification articles:
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