What is portfolio diversification?

Portfolio diversification is selecting several asset classes to increase returns while lowering risk. The asset classes for portfolio diversification are stocks and bonds: treasury and non-treasury. The elements of portfolio diversification are risk-free, low-risk, medium, and high-risk.

What is diversification & why is it important?

Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time. One of the keys to successful investing is learning how to balance your comfort level with risk against your time horizon.

Should a 60/40 portfolio be diversified?

For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds. Meanwhile, others have argued for more stock exposure, especially for younger investors. One of the keys to a diversified portfolio is owning a wide variety of different stocks.

Do you need to diversify your portfolio to protect against risk?

Everyone is clear on this: investors must diversify their portfolios to protect against risk. Though it becomes less efficient to diversify under extreme conditions, typical market conditions will almost always mean a well-diversified portfolio can significantly reduce the risk that investors face.