Series 82: Diversification

Diversification

There is perhaps no more well-known portfolio management technique than the basic concept of diversification. As the name implies, diversification is the process of making a portfolio that is over-concentrated in just a few positions more diverse with the goal of minimizing the portfolio’s nonsystematic risk. In doing so, the customer seeks to reduce the possibility that poor performance in one position will destroy an entire portfolio’s return. One strategy for achieving diversification is the buying of uncorrelated or negatively correlated assets, or assets that do not have a history of moving the same direction at the same time. Uncorrelated assets are those whose performances are unrelated to one another. When one asset is up, the other asset may be either up or down.