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What Does Diversification Really Mean?

[/fusion_text][fusion_text]I’m a big fan of cutting the jargon out of investing. There’s no sense in creating an entire language that only finance folks speak and then expecting you to learn it for fun. To that end, let me help translate one of my favorite investment terms – diversification.

The simplest way to explain why you want to diversify is to use the phrase, “Don’t put all of your eggs in one basket.” Easy enough. Don’t put too much of your money into any one thing. That way if tech stocks crash, you aren’t in the poor house.

Let’s expand that idea a little more. Diversification isn’t just about removing the worst outcomes. It’s about increasing the likelihood of the good outcomes. What you really gain through diversification is consistency. I want the most reliable outcomes I can get for our clients, while still giving good returns. Here at ASA we strive for above average long-term returns that are as consistent as possible.

The way I see it, the biggest risk, and maybe the only one that matters, is the risk that you don’t meet your financial goals. Diversification reduces that risk.

Side note for the finance geeks, ignore the text books that tell you that owning 30 U.S. stocks means you are diversified. You should want thousands of stocks, not just in the U.S., but around the world. That will do a much better job of improving consistency.

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Data provided by Bloomberg. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. Many nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. China market capitalization excludes A-shares, which are generally only available to mainland China investors.

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Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.