Diversification is a good thing; it is the most effective, least expensive, and easiest-to-implement strategy in an investor’s toolbox to reduce the risk of loss, without sacrificing return. The concept of diversification is readily grasped in a bit of homespun wisdom: when your mother advised “not to put all your eggs in one basket,” she was telling you to diversify.
In a recent article posted to LetsMakeaPlan.org, CFP Board tackles not only the “why” of diversification, but also suggests the questions you should be asking when diversifying your assets:
How diversified should I be?
It used to be that you could diversify by holding three basic asset classes: stocks, bonds, and cash. But trends over the past 40 years have made this approach too simplistic. With globalization and the creation of marketable securities for illiquid and directly-held assets, it is possible—and advisable—to expand one’s investment repertoire.
Is it possible to do too much diversifying?
Yes, particularly when investors uncritically believe that more is better than less. It has been shown that sufficient diversification of a U.S. stock portfolio can be achieved with approximately 10-13 stocks.
What other risks can be diversified?
Beyond asset classes, other areas in an individual’s financial life can all benefit from diversification, including human capital (the skills, education and professional experiences brought to the workplace), the type of accounts used for investing, and for large investments, acquisition costs.
ABOUT CFP BOARD
The mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning. The Board of Directors, in furthering CFP Board’s mission, acts on behalf of the public, CFP® professionals and other stakeholders. CFP Board owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. CFP Board currently authorizes 74,000 individuals to use these marks in the U.S.