DIVERSIFICATION The Critical Element of Portfolio Management
By Ken Faulkenberry
Diversification is the single most important element of investment planning. Diversification is a portfolio strategy that reduces risk by combining different investments that are not correlated. The volatility (risk) of the portfolio is reduced because not all asset groups, industries, or stocks move together. The goal of diversification is to reduce risk.
Lack of diversification and over diversification are two common mistakes made by investors. Lack of diversification (putting all your eggs in one basket) is the most dangerous and ruinous mistake possible. Over diversification can result in a portfolio performing like the market. Many investors have experienced the bad results of over diversification during the current decade. Most institutional vehicles (i.e. diversified mutual funds, pension funds, etc.) are over diversified and simultaneously lack an asset allocation needed for success in today’s challenging environment.
Proper Diversification can reduce many kinds of risk including company specific risk, poor fund management risk, industry risk, and market risk!
Company specific risk is risk that is specific… [ read more at http://blog.arborinvestmentplanner.com ]
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