Portfolio diversification is often discussed as if it only relates to stocks. In reality, it relates to all asset classes. Learn how this crucial investment principle works.
What is Portfolio Diversification?
An investment portfolio is a collection of one’s investments. This includes not only stocks, but also other asset classes, such as:
- Fixed income (bonds)
- Cash equivalents
- Real estate and tangible assets
Portfolio diversification refers to the distribution of money within a specific asset class in order to reduce the overall risk of one’s investment portfolio. This variation will be balanced according to one’s investment goals, whether they’re conservative or aggressive.
How is Diversification Different from Asset Allocation?
Asset Allocation
Asset allocation refers to the actual act of investing in several different asset classes. This practice is also intended to reduce the overall risk of one’s portfolio.
For example, an investor may distribute 75 percent of their money to stocks and 25 percent to bonds. That distribution of funds is known as allocation.
Portfolio Diversification
On the other hand, portfolio diversification refers to the way in which money is varied within a certain asset class.
To continue with the previous example, within that 75 percent of money the investor has dedicated to stocks, they may have, 50 percent in large-cap stocks, 35 percent in mid-cap stocks and 15 percent may be in small-cap stocks.
How are Diversification and Allocation Related?
Asset allocation provides more of a “big picture” look of an investment portfolio, while diversification shows the more granular, specific assets in which money is invested.
Still, the goal of both is to minimize an investor’s risk as much as possible, without compromising their potential to reach their investment goals.
Diversification in Action
La Ferla Group offers portfolio management investment advisory strategies based on our clients’ investment objectives and risk tolerance. These strategies rely on asset allocation and portfolio diversification to effectively balance risk and reward.
Our portfolio management strategies include:
Global Balanced Advisor
An All-Cap Core Worldwide strategy managed to moderate risk, searching the globe to find the best investments in the equity and fixed income markets.
Growth Equity Portfolio
An All-Cap Core strategy primarily investing in United States equities.
Diversified ETF Portfolio
An All-Cap Core Global Equity ETF strategy managed to aggressive risk.
Multi Asset Advisor
A non-discretionary investment advisory strategy in which the client and portfolio manager work together to achieve objectives.
Muni Bond Advisor
A discretionary or non-discretionary investment advisory strategy for clients who want to invest in municipal bonds.
Cash Balance Portfolio
Managed to a fixed interest rate, whereby securities are selected to achieve target performance.
The first three investment advisory strategies are All-Cap strategies. That means they’re made up of stocks from companies of all sizes. The others are customized and managed to achieve specific goals. In other words, all are thoroughly diversified.
Portfolio diversification and asset allocation are two critical investment principles. Understanding these principles thoroughly helps investors grow their assets.
