Episode 16: What is Diversification?

In episode 16 on the Wilson Wealth Management YouTube channel, we begin our look at portfolio diversification. As well as its key component, asset correlation.

Another crucial piece in successful wealth accumulation. Proper diversification is the best means to manage investment risk in a portfolio. By so doing, it may allow you to invest in relatively higher risk assets, which will provide higher expected returns.

By not doing so, you will end up with inefficient investment portfolios. With greater than warranted risk and/or lower than optimal expected returns.

As with compound returns, properly understanding and incorporating diversification techniques into your investing strategy will allow for better performance and cumulative growth.

So we will spend some time on diversification. In this episode, we address:

What is diversification?

Why is it so important for investors in successfully accumulating wealth?

Investopedia states that “Diversification is a risk management technique that mixes a wide variety of investments within a portfolio.” True.

But what constitutes “wide”? 5, 50, 500 investments?

And what sort of “variety” do you require to properly diversify?

Investopedia also states “that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security.”

Is that accurate?

Finally, what is asset correlation? How does it factor in to diversifying your portfolio?

If you would like to read more on this initial discussion, please review “Introduction to Diversification” and “Diversification and Asset Correlations”.