Diversification | What it Really Means
According to Wikipedia, "diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk."
Investopedia has a slightly different take, saying that "[d]iversification is a risk management strategy that mixes a wide variety of investments within a portfolio."
To many, diversification means to invest in the market in general. You can do that by investing in a broad market index, such as an ETF that tracks the S&P500 index. There's also the Russel indexes. Basically, if you own the market, you get the market return.
The Contrarian View on Diversification But diverse does not necessarily mean more. The goal of diversification is not to get the market return but to reduce exposure to a particular event.
What you are trying to achieve by being diversified is to make sure not everything you are investing in moves in tandem. By doing so, you embed optionality into your portfolio.
If you accept this reason…
Investopedia has a slightly different take, saying that "[d]iversification is a risk management strategy that mixes a wide variety of investments within a portfolio."
To many, diversification means to invest in the market in general. You can do that by investing in a broad market index, such as an ETF that tracks the S&P500 index. There's also the Russel indexes. Basically, if you own the market, you get the market return.
The Contrarian View on Diversification But diverse does not necessarily mean more. The goal of diversification is not to get the market return but to reduce exposure to a particular event.
What you are trying to achieve by being diversified is to make sure not everything you are investing in moves in tandem. By doing so, you embed optionality into your portfolio.
If you accept this reason…
