No one wants to lose money. When you diversify you spread your investments across multiple securities to reduce the risk from any one. Diversification may lower your portfolio's risk and can increase your expected returns for any given level of risk you take. That makes it easier for you to invest successfully.
What is Diversification?
Diversification is combining different types of investments, like retail stocks with technolgy stocks and energy stocks, that don’t all move in the same direction (non-correlated), by the same amount, at the same time in reaction to market forces.
By combining different investment types that don’t move together, it is possible to generate more return without increasing risk — when one security or securities from one sector perform poorly, others may perform well. Diversification allows you to incur less risk and achieve higher expected returns in the market over an extended period.
Almost all institutional investors, pension funds, and investment advisors diversify. All mutual funds and ETFs diversify to reduce the risk from just one or a few companies. Even narrowly focused funds do that, while keeping the risk from a sector or industry.
Research has found that under-diversification could cost investors between 30% and 50% of your total lifetime return1. Unfortunately many investors don’t take advantage of the full range of diversification benefits available to them2.
At least two reasons for this are that diversifying with individual stocks like the professionals has never been affordable or easy enough for individual investors, until now.
That's why we started BerkAdvisory!
1http://papers.ssrn.com/sol3/papers.cfm?abstract_id=733804 & http://www.quantext.com/DiversificationPremium.pdf which suggests that, based on a range of estimates from institutional investors and advisors, effective diversification can add 2% per year in total return to a simple portfolio that is 60% S&P 500 and 40% bonds, without adding risk. Missing this diversification benefit equates to 35% less wealth for an investment in this portfolio over a 20-year period, and more over longer time periods, compared to the well-diversified portfolio.
