The Importance of Diversification

A recent article in Vanguard argues that diversification is the best way to control the risk that is necessary to generate portfolio returns. Here are the main takeaways: Fund type matters: While equity funds can spread holdings across a range of shares, the level of diversification accomplished varies with the type of fund: “A fund that  focuses solely on a certain part of a particular market, such as UK smaller companies, won’t give you as… Read More

The Importance of Diversification

A recent article in Vanguard argues that diversification is the best way to control the risk that is necessary to generate portfolio returns. Here are the main takeaways: Fund type matters: While equity funds can spread holdings across a range of shares, the level of diversification accomplished varies with the type of fund: “A fund that  focuses solely on a certain part of a particular market, such as UK smaller companies, won’t give you as… Read More

International Equities and Diversification

The evolution of the global economy has changed the relationship between U.S. and international stocks such that equity investments in many developed companies provide little diversification benefit. This according to an article in CFA Institute. The article argues that although many U.S. investors allocate to international equities in the hopes of diversifying portfolio risk without compromising long-term returns, the data paints a different picture. Specifically, it reports, “sometime in the mid-1990s, international stocks stopped outperforming… Read More

If You Think You’re Diversified, Think Again

Diverging performance doesn’t necessarily signal true diversity, says Nomura quant strategist Joseph Mezrich. This according to a recent article in Barron’s. While selecting stock groups based on different characteristics should offer adequate diversification, the article argues that investors should be more focused on whether those different stock groups are reacting to the same underlying driver, which would point to a lack of diversity. Mezrich recently published a research report asserting that, based on this criterion,… Read More

Home Investing Bias Overrated

A recent Morningstar article reports that most U.S. investors have a home bias and suggests that “foreign stocks should represent a considerable portion of most investors’ portfolios.” “Home bias isn’t unique to U.S. investors,” the article says, “and it’s understandable. Domestic stocks tend to have less currency risk than foreign stocks, which tends to make them slightly less volatile and more appealing, as most investors’ expenditures are predominately in their home currency.” It argues, however,… Read More

Zweig: “Smart” Money is Bailing on U.S. Stocks

Wall Street Journal columnist Jason Zweig writes that while data shows how the S&P 500 has outperformed international stocks for years, the numbers can “play tricks on you. It still makes sense to add international stocks to a U.S. portfolio, probably more so than ever.” Zweig notes that while the numbers show that the U.S. market has dominated over the long run, it’s only because stocks have done so well in the recent past. “Lofted… Read More

How Many Stocks Does it Take to Be Diversified?

“Many people believe that diversification beyond 10 or 20 securities is superfluous despite clear research indicating that the opposite is in fact the case,” says an article in the July issue of the AAII Journal. The article defines different types risk (including firm risk, industry risk and market risk), then cites past research findings and a “history of erroneous reasoning regarding adequate portfolio size.” It outlines the findings of an AAII study to “address the… Read More

You Might Need Fewer Funds Than You Think

Diversification in a portfolio is a good thing, but only up to a point. This according to a recent article in The Wall Street Journal. With the number of options for mutual funds and ETFs “exploding,” the article says, ‘investors might be tempted to purchase more funds.” It argues, however, that they can assemble a diversified portfolio with fewer than five and, “for plenty of people, just one will do, some financial advisers and analysts say,”… Read More

Yale Endowment Learns Lesson on Diversification

Strong long-term performance has made the Yale University endowment fund—with a mere 4% weighting in U.S. stocks and heavy allocations to alternative investments– the widely accepted diversification model, according to a recent article in Barron’s.  In the last ten years, however, the approach hasn’t worked so well. The fund has “lagged the U.S. equity market amid one of the great bull runs in history,” the article says, adding that a buy-and-hold investor in the S&P… Read More

Portfolio Strength in Diversification

Recent market volatility notwithstanding, 2016 has been a “relatively good” investing year. This according to Zachary Karabell, head of global strategy at Envestnet, in an article for Barron’s. His opinion, however, is based on performance of a diversified portfolios as opposed to “esoteric” strategies such as “those of many hedge funds.” The performance of assets this year, he writes, “should be a sign that markets are stable and performing decently, rather than a harbinger of… Read More