| You've no doubt heard the expression "don't put | | | | Chances are, your real estate holdings or |
| all your eggs in one basket". Nowhere is this | | | | small-cap emerging markets stocks will be up |
| saying more relevant than in the realm of | | | | when your large-cap US stocks are down, or |
| investing. Studies have shown that diversifying | | | | your bonds will be up while your precious metals |
| your investment portfolio, i.e. not putting all your | | | | are down, or any combination thereof. Over time, |
| eggs in one basket, decreases a your portfolio's | | | | these non-correlated asset class returns will |
| risk substantially: yes, they actually had to do a | | | | counteract each other and greatly reduce the risk |
| study to determine this. That probably comes as | | | | of your overall portfolio. |
| no shock to you. What may be surprising is that | | | | To be properly diversified, you need at least two |
| diversification can also increase your returns at | | | | non-correlated asset classes in your porfolio. US |
| the same time. | | | | stocks and government bonds are the most |
| Modern Portfolio Theory is the study of how | | | | common asset classes owned by investors, but |
| risk-averse investors can build portfolios to | | | | there are many others. Real estate, precious |
| maximize expected investment return at any | | | | metals, commodities, foreign stocks, emerging |
| given level of portfolio risk. Over the years, we | | | | market stocks, and even small-cap stocks are all |
| have gained an ever greater understanding of | | | | considered separate asset classes and offer |
| how diversification works to both increase returns | | | | different degrees of diversification benefits from |
| and decrease risk. At its core, diversification is | | | | large-cap US stocks and government bonds. You |
| about holding a portfolio of several different | | | | should own as many different asset classes as |
| volatile asset classes that are not highly-correlated | | | | you feel comfortable owning without becoming |
| with one another. That is, your bond allocation | | | | overwhelmed by details in order to maximize |
| should zig when your stocks zag and vice versa. | | | | returns and minimize risk. |