Diversify, But Don’t Diworsity
Diversification is a valuable risk management tool, but only when used properly. Diversification only adds value when the new asset added has a different risk profile.
For example, when diversifying a U.S. stock portfolio, you may want to consider non-related markets like gold, gold stocks, real estate, bonds, commodities, and other asset classes that exhibit low or inverse correlation.
Dwarfing is adding more assets with a similar risk profile until your investment performance replicates the averages. For example, adding U.S. equity mutual funds to a diversified portfolio of U.S. stocks is di-worse-fiction.
Your goal when diversifying should be to add independent and sometimes opposing sources of return. This can lower portfolio risk and possibly increase overall return when coupled with other investment techniques.
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