Broker Check
21 - Investing Controllables Part 4 - Broad Diversification

21 - Investing Controllables Part 4 - Broad Diversification

March 31, 2023

Who May Benefit? Everyone

What Is It? Within each asset class, broad diversification involves owning a large number of stocks, bonds, or other assets rather than just a few.

Why Is This Valuable? Broad diversification is a strategic approach that historically increased the odds of solid returns over time. Rather than being a "throw in the towel" cop-out, it helps reduce risk and improve overall performance. Most active investors fail to beat their benchmark index ("the market"). Multiple studies have shown that most of the stock market index returns have come from a small number (7% in one study) of high-performing companies. Broad diversification increases the likelihood of owning such companies. In bond markets, risks from default, interest rate hikes, inflation, and currencies also support broad diversification.

How Do I Do This? Instead of picking individual stocks and bonds, consider using exchange-traded funds (ETFs), mutual funds, or other managed solutions that provide broad diversification. By simply owning something close to the overall market, you may beat most investors, as most investors fail to beat the indices. To further explore diversification strategies, utilize online resources, financial books, or consult with a financial professional.