.
.
CLICK HERE TO READ THE SKILLED INVESTOR’s OTHER ARTICLES ABOUT THESE “10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION.”
Diversification is genuinely an investment “free lunch,” and it is a key contributor to improved investment risk management.
Diversification 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 necessity. Increased diversification reduces portfolio risk without a corresponding reduction in expected portfolio returns. Diversification is genuinely an investment “free lunch,” and it is a key contributor to improved investment risk management. (Click here to read: 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, because the specific risks of businesses and other investment entities can be reduced or eliminated from a portfolio without reducing expected returns.
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 reason to 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?
Click any these links below to read our other investment portfolio diversification articles:
Bookmark on Your Favorite Service:
These icons link to social bookmarking sites where readers can share and discover new web pages.
Tags:
asset classes,
diversified portfolio,
employment agreement,
exchange traded funds,
free lunch,
Individual Investors,
individual securities,
investment risk management,
optimal portfolio,
personal investing,
personal portfolio,
portfolio diversification,
portfolio returns,
portfolio risk,
theskilledinvestor.com
.
If you like
this article, please consider subscribing to our full text RSS feed.
You can also subscribe via email, and new posts
will be sent directly to your inbox.
.
READERS FAVORITES: Our Top 30 Articles for You to Read
The Optimal Investment Strategy for Individual InvestorsDefault under the Citibank Credit Card ContractThe Top 25 Best Low Cost US Money Market Funds10 Lower Cost S and P 500 Index Mutual FundsPublish your blog news articles on traditional media center and newspaper websitesTraditional IRA and 401k Versus Roth IRA and Roth 401k ContributionsFactors Favoring Roth IRA and Roth 401k Plan ContributionsRational Mutual Fund and ETF SelectionHow unstable have stock market returns been over time?Factors Favoring Roth IRA and Roth 401k Plan Contributions - Part 2Screening Index Mutual Funds with IndexUniverse.comAmerican Funds - The Investment Company of America - Class A Shares (AIVSX) net a +3 Fund Authority ScoreAnalyze Multiple Personal Financial Planning Decisions Simultaneously with VeriPlanAvoid High Turnover Mutual Funds and Active ETF TradingOwn Investment Mutual Funds and ETFs - Not Individual SecuritiesAmerican Funds - Washington Mutual Investors Fund - Class A Shares (AWSHX) acquire a +2 Fund Authority ScoreFinancial Industry Product Development and Your Best InterestsObjective Personal Finance Answers Are Hard to FindMutual Fund and ETF Screening RequirementsThe Financial Services Industry is Still the Largest S&P 500 Sector - Even after the Collapse of its Stock ValuesDevelop Your Own Personal Financial Planning Skills - Step 1 of 10 Financial Planning Steps in the Right DirectionAlways Completely Diversify Your Investment PortfolioMost Individual Investors Are Poor Personal Portfolio ManagersExcessive Investment Expenses Take 2% of Individual Investor Assets Every YearRational Mutual Fund and ETF Screening RulesMake More Optimal Tradeoffs Between Investment Risk and ReturnFee-Only Compensation Aligns the Interests of Clients and their Financial AdvisorsWhere's Waldo? - The illusion of superior professional mutual fund manager performance.Choose Lower Mutual Fund and ETF Management FeesMarch 5 2007 Edition of the Festival of Stocks
.
Article comments
NOTICE: YOU MUST AGREE TO THE TERMS OF USE TO USE THIS WEBSITE.
These links will take you to our Terms of Use, our Privacy Policy
and our Copyright Policy.
This site is solely for informational and educational
purposes related to your personal, private, and non-commercial use.
- In no way does this site constitute or provide
investment advice under the laws and regulations of the United States of America and its various States or of any other country in the world.
- This site does not collect any specific information on the investment situation of any reader.
- This site does not render any advice on the basis of any readers' specific investment situation in accordance with the Investment Advisers Act of 1940, as amended.
- In no way does this site constitute a solicitation or offer to sell securities of any kind.
Copyright 2008 - Lawrence Russell and Company, All rights
reserved worldwide.
This site is financial publication of general and regular circulation. Except for reading and browsing via the World Wide Web, no part of this document or website
may be reproduced, modified, disseminated, published, adapted in any manner or transferred without permission in writing from Lawrence Russell and Company.
THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, FOR THIS WEBSITE, INCLUDING NO WARRANTY FOR MERCHANTABILITY AND NO WARRANTY FOR FITNESS FOR ANY PARTICULAR PURPOSE.
Unless otherwise stated, there are no business arrangements of any kind between The Skilled Investor and any mutual fund, ETF, or other investment security or any company that may be featured in our articles. We do not accept any payments to influence what we write about or what we say. The Skilled Investor does allow advertisers to post their messages on our site, and it is entirely your choice whether or not to patronize any of these advertisers.
"The Skilled Investor", "Skilled
Investor", "Fund Authority," "Fund Authority Score," "VeriPlan", "Personal Finance Software for Your Lifetime", "Your Personal Financial Lifecycle Planner",
and "Sensible and Scientific Financial and Investment Planning" are some of the trademarks of Lawrence Russell and Company. Other trademarks and service marks are the properties of their respective owners.
No comment yet