Always Completely Diversify Your Investment Portfolio

Complete portfolio diversification is always a better idea.

On average, the securities markets will not pay you to hold any skewed subset of the overall market. Doing so is just a gamble that may or may not pay off. You should not expect to be paid any more for the added risk and anxiety.

A previous article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable set of financial beliefs can help you to keep focused and on track throughout your life. This follow-up article discusses the need to diversify your portfolio fully to eliminate uncompensated investment risks.

Portfolio diversification is the only genuinely ‘free’ financial lunch that is available to individuals. A diversified portfolio is expected to deliver the same expected return with lower expected risk compared to an undiversified or partially diversified portfolio. To diversify completely, hold the full market in your portfolio, instead of a subset of it. Always really does mean always. (See: Why is diversification valuable to individual investors? and Is the average individual investor portfolio well diversified?)

The value of diversification comes from risk reduction. Diversification reduces overall portfolio risk, but it does not increase expected returns. It produces no free money. It just helps reduce the variability of the expected outcome. Greater certainty, even if still uncertain, is highly beneficial to any risk-averse investor. (See: Can a limited number of stocks provide complete portfolio diversification?)

Index investment funds can provide full diversification at a very low-cost. Holding individual securities will not. Securities markets tend only to compensate overall market risk and a couple of other well established, but relatively minor additional risk factors. Additional enterprise level risks that are inherent in owing individual stocks and bonds are not compensated. Bearing such risks is unnecessary and unproductive. Furthermore, tracking details about individual companies is just a huge waste of your valuable personal time, as you try to pick one company’s securities over another’s. (See: Investment securities markets do not pay you for the risks of holding individual common stocks and bonds and How many mutual funds are needed for a well-diversified portfolio? – evidence)

If you hold any concentrated position in the securities of any individual firm, you should quickly take steps to diversify. If you hold a concentrated position in the same firm that issues your paycheck, you certainly should liquidate and diversify without any further delay. If taxes or other considerations inhibit making immediate changes, consult with an advisor about alternative strategies to use, until you can liquidate your concentrated position in an orderly manner.

Click here to get more information about Personal Finance Calculator

Related Personal Financial Planning Posts

• The Heavy Burden of Recurring Investment Expenses and Fees ( The heavy burden of recurring investment fees (Part 1 of 2) Recurring investment costs can significantly impact the long-term value of your retained investment portfolio assets. Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees are charged periodically, as a percent of your investment assets. The relative cost-efficiency of your investment portfolio [...])
• I Want My Treasure Back Please ( PIRATES OF THE CREDIT SEA - Part 3: I want my treasure back!! (Please) What are my rights in the situation that I summarized in my previous article: "PIRATES OF THE CREDIT SEA: My Treasure Is Taken!"? Well, the answer is very simple. I have a contractual right to get my treasure back. I also have [...])
• The Optimal Investment Strategy for Individual Investors ( The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient A previous article, "The Problem - Straight answers about personal financial and investment planning are difficult to find," summarized important reasons why individuals may experience difficulties, even if they are intent upon doing better with [...])
• June 28 2007 Edition of the Carnival of Financial Planning ( Carnival of Financial Planning - June 28, 2007 Edition Welcome to the June 28, 2007 edition of the Carnival of Financial Planning. The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security. This [...])
• October 4 2007 Edition of the Carnival of Financial Planning ( Carnival of Financial Planning - October 4, 2007 Edition Welcome to the October 4, 2007 edition of the Carnival of Financial Planning. The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security. This [...])
• July 12 2007 Edition of the Carnival of Financial Planning ( Carnival of Financial Planning - July 12, 2007 Edition Welcome to the July 12, 2007 edition of the Carnival of Financial Planning. The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security. This [...])
• Time Spent on the Wrong Financial Activities Is Bad for You ( Spending your valuable time on the wrong financial activities is just plain bad for you A previous article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. This follow-up article discusses the [...])
• I Write to the President of CitiBank Customer Service ( PIRATES OF THE CREDIT SEA -- Part 5: I write to the President of CitiBank Customer Service My saga to recover my credit card treasure continues. Previous articles have covered the particulars of my situation, and I will not repeat them. In summary, for fifteen years I have always done my best to conform to my AT&T [...])