EFFECTIVE DIVERSIFICATION

“Don’t put all of your eggs in one basket.” 

As an investor, you may have heard this old saying used to emphasize the need for a diversified portfolio. 

Most investors today understand the importance of diversification, University of Chicago professor, Harry Markowitz, won a Nobel Prize in Economics for his groundbreaking work in this area.

Though diversification does not guarantee a profit or protect against a loss, a combination of asset classes may reduce your portfolio's sensitivity to market swings because different assets - such as bonds and stocks - will react differently to adverse events. 

For example, the stock and bond markets tend to move in opposite directions; and even when they move in the same direction, they usually don’t move to the same degree. So if your portfolio is diversified across both markets, downward movements in one may be offset by positive results in another.

We believe there are 4 primary ways to diversify your portfolio to decrease volatility:

  • Combine Multiple Asset Classes that have historically experienced dissimilar return patterns across various financial and economic environments.
  • Diversify Globally–more than 50% of global stock market value is non-US, and international markets as a whole have historically experienced dissimilar return patterns to the US.
  • Invest in Thousands of Securities to limit portfolio losses by reducing company-specific risk.
  • Invest in High–Quality, Short-Term Fixed Income. Consider shorter maturities that have low correlations historically with stocks. Lower default risk with high-quality instruments.