Key Investment Principle #2… Diversification, Diversification, Diversification
Significant research has been performed over the years to determine what impact diversification can have on the risk and return dimensions of a portfolio.
Capital markets are composed of many classes of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class.
There are numerous asset classes both in the U.S. and abroad, each with historical price movements that tend to be distinct from one another. In addition, in today's changing global landscape, the use of international investing (both in developed and emerging markets) has taken on increased importance. Research shows that investor portfolio's are best served from a risk and return standpoint by being diversified across all asset classes as well as within each of those asset classes. Examples of different asset classes include, among others: large cap stocks, small cap stocks, value stocks and growth stocks...in both U.S. and foreign markets. (Sector companies such as the communications industry or the health care industry, as well as single foreign countries, are not considered asset classes.)
Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. As a result, investors have the opportunity to achieve greater expected returns over time with lower standard deviations (volatility) than they would in a less comprehensive portfolio.
In the end, the goal of diversification is to provide the investor with global investment solutions that attempt to maximize returns at a reduced level of risk.