In addition to limiting non- systematic risk, one of the goals of creating a diversified portfolio is to provide a more consistent return year in and year out. In the long run, consistency provides a greater profit than you’d achieve fluctuating between some stellar years and some black holes. Diversifying means buying a number of investments within an asset class. No matter how good a blueprint is, it doesn’t guarantee high-quality results. You also need superior construction. In investment terms, this means building your portfolio by selecting a diversified group of securities for each asset class you invest in and ensuring that each security meets your criteria for investing. For example, if US equities are one of your asset classes, you might choose
a number of individual stocks. Or you might diversify by choosing a variety of mutual funds or exchange-traded funds (ETFs) investing in US equities. Diversification within each asset class is essential because it allows you to offset, or dilute, security-specific risks. You can expect securities that share similar characteristics to react in much the same way to specific factors or situations. For example, one of the major determinants of the value of any long- term corporate bond is   Read more…