The Enduring Importance of Diversification
Why spreading investments across asset classes, geographies, and factors remains one of the most reliable ways to improve risk-adjusted outcomes.
Sign up for our weekly newsletter & download the eBook free.
Diversification is often summarized by the phrase “don’t put all your eggs in one basket.” In practice, it is a more nuanced and powerful concept.
How Diversification Reduces Risk
True diversification reduces exposure to risks that are specific to individual companies, industries, countries, or asset classes. When assets do not move in perfect lockstep, the volatility of the overall portfolio can be lower than the weighted average of the individual volatilities. This risk reduction does not necessarily require sacrificing expected return; in many cases it improves the risk-adjusted return profile.
Levels of Diversification
Effective diversification operates at multiple levels:
Across asset classes (equities, fixed income, real assets, alternatives)
Within equities (U.S., international developed, emerging markets; large-, mid-, and small-cap; growth and value styles)
Within fixed income (government, corporate, municipal; varying durations and credit qualities)
Across factors and strategies when skill or structural premia exist
Avoiding Common Pitfalls
Over-diversification is possible—holding so many positions that the portfolio essentially becomes a high-cost index with no meaningful active decisions—but most individual investors and many portfolios err in the opposite direction through concentrated stock positions, home-country bias, or heavy reliance on a single asset class.
An asset management firm constructs diversified portfolios using a combination of broad market vehicles, factor or style tilts where justified, and satellite holdings that add differentiated sources of return. Periodic rebalancing maintains the diversification benefits as relative performance causes allocations to drift.
Diversification does not eliminate losses in severe market declines when correlations rise, but it remains one of the few free (or low-cost) lunches available to investors and a cornerstone of prudent long-term investing.
Investing risk disclosure
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Mahoney Asset Management for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
Important consumer information
This web site has been prepared solely for informational purposes. It is not an offer to buy or sell any security; nor is it a solicitation of an offer to buy or sell any security.This site and the opinions and information therein are based on sources which we believe to be dependable, but we can not guarantee the accuracy of such information.
Representatives of a broker-dealer or investment adviser may only conduct business in a state if the representatives and the broker-dealer or investment adviser they represent: (a) satisfy the qualification requirements of, and are approved to do business by, the state; or (b) are excluded or exempted from the state’s licenser requirements.
An investor may obtain information concerning a broker-dealer, an investment advisor, or a representative of a broker-dealer or an investment advisor, including their licenser status and disciplinary history, by contacting the investor’s state securities law administrator.
The financial calculator results shown represent analysis and estimates based on the assumptions you have provided, but they do not reflect all relevant elements of your personal situation. The actual effects of your financial decisions may vary significantly from these estimates–so these estimates should not be regarded as predictions, advice, or recommendations. Mahoney Asset Managment does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences.
Securities: are not FDIC-insured / are not bank-guaranteed / may lose value
This information is intended for use only by residents of CA, CT, DC, FL, MA, MD, MN, NC, NJ, NY, OH, PA, and VA. Ken Mahoney may only conduct securities business with residents of the states and/or jurisdiction for which they are properly registered.
Securities offered through Newbridge Securities Corporation, member FINRA, SIPC.
Investment Advisory services through NFSG Corporation an SEC Registered Investment Advisor.
Office of Supervisory Jurisdiction: 1200 N. Federal Hwy., Ste. 400, Boca Raton, FL 33432. Phone 954.334.3450 Fax 954.489.2390
Specific recommendations can only be based on review of a number of suitability factors including but not limited to the investors financial profile, investment objectives, risk tolerance and the investors review of appropriate offering documents. Past performance is no guarantee of future results. To help you make informed decisions, we provide you with essential disclosures, such as Regulation Best Interest (Reg BI), the Client Relationship Summary (CRS), and Form ADV. Linked sites are strictly provided as a courtesy. Newbridge Securities, Inc. does not guarantee, approve nor endorse the information or products available at the sites, nor do links indicate any association with or endorsement of the linked sites by Newbridge Securities.
Copyright © Mahoney Asset Management