What is the correlation between asset class performance and portfolio diversification?

A high correlation exists between the returns investors achieve on their holdings and the underlying asset class performance of those holdings. True portfolio diversification is achieved through selecting and holding a variety of asset classes, rather than individual stock-picking and market-timing. Ideal asset allocation is not static.

What are the different types of diversification strategies?

There are plenty of different diversification strategies to choose from, but their common denominator is buying investments in a range of different asset classes. An asset class is nothing more than a group of investments with similar risk and return characteristics. For example, stocks are an asset class, as are bonds.

What is a diversified portfolio?

To professional money mangers, diversification involves investing in several different asset classes. This means that a portfolio of different individual stocks isn’t diversified. Neither is a portfolio holding only large-, mid- and small-cap mutual funds.