Diversification is a portfolio risk management technique that mixes a wide variety of investments within an investor portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio so the positive performance of some investments neutralizes the negative performance of others.
Therefore, the benefits of diversification hold only if the securities in the portfolio are not perfectly correlated, such real estate and stocks.
Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction.
Those with alternative investments, such as real estate, benefit by adding a portfolio of 25 stocks for further diversification benefits, but also liquidity, 24/ access and transparency to account holdings, current income and possible inflation hedge.
For more information or to discuss strategies to decrease portfolio risk, contact LaToya Maddox.