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:
Tags:
portfolio risk
Personal Financial Planning
- Summary Table of Traditional IRA and Roth IRA Tax Rules (
Summary Table of Traditional IRA and Roth IRA Tax Rules
For your convenience, The Skilled Investor has provided a detailed table that summarizes 2007 rules for traditional IRAs and Roth IRAs.
Because this table has 13 columns and 20 rows, it is too large to be displayed properly in a blog posting. To view this table and [...])
- Set your personal savings and other financial goals – Step 2 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION."
The single most significant financial lever that individuals control directly is their management of personal expenditures. The second is their lifetime effort to obtain sufficient income. Most people simply do not save enough of their current income [...])
- Most Individual Investors Are Poor Personal Portfolio Managers (Most individual investors are poor investment portfolio managers
Investors more easily understand investment costs that are directly measurable, such as fees deducted on investment statements. However, many investors ignore or are unaware of the “opportunity costs” of their sub-optimal investment behaviors. Opportunity costs are usually much more difficult to measure directly, but these investment costs can [...])
- Schwab S&P 500 Index Fund – Select Shares (SWPPX) capture the Best +10 Fund Authority Score (
Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise, objective, and realistic summaries of mutual funds and ETFs for comparisons within [...])
- American Balanced Fund – Class A Mutual Fund Shares (ABALX) collect a +1 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for the American Balanced Fund - Class A Shares.
The diversified investment fund strategy of the American Balanced Fund - Class A mutual fund shares
According to its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the investment [...])
- Best Personal Financial Planning and Investment Articles (
Best Personal Financial Planning and Personal Investment Articles this Week from Personal Finance Blogs
Carnival of Financial Planning - Edition #169 - January 2, 2011
Welcome to the January 2, 2011 Edition #169 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 [...])
- Vanguard 500 Index Fund – VFINX – merits the Best +10 Fund Authority Score (The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S and P 500 tracks about 75% of publicly traded U.S. equity market asset value. The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 [...])
- What Is Investment Portfolio Diversification? (
From the perspective of holding a well-diversified investment portfolio according to scientific investment principles, the objective of diversification is to minimize or eliminate ‘unsystematic risk’ or those risks that are not related to the price volatility of the overall securities markets.
When people speak of investment diversification, they may mean different things. Therefore, clear definitions are [...])
- Use Scientifically Based Financial Planning Strategies (
VeriPlan is designed to help you pursue scientifically based financial planning strategies
VeriPlan offers you unprecedented direct control to perform your own automated personal financial planning. VeriPlan's functionality also implements the principles of scientific finance. VeriPlan's internal documentation and its links to information on the web help you to understand scientifically based personal financial planning and [...])
- Avoid Mutual Fund and ETF Sales Commissions and Fees (
Avoid mutual funds and ETFs with sales commissions and marketing fees
Summary: There is no convincing evidence that sales loads and other sales fees charged to investors result in higher mutual fund and ETF performance.
In fact, the opposite has repeatedly been proven true with mutual funds, which have a long performance history to evaluate. Paying a [...])
- 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 [...])
- 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, [...])
