Portfolio and Investment Diversification is the process and strategy of spreading investments among a variety of securities to mitigate the risk associated with having one, a few or similar investments. The objective is to have a variety of investments that are not affected by or react to the same factors of the economy or the market. What may have a negative effect on one investment may have a positive or neutral effect on another. This usually results in the ability to counteract negative performance of a particular investment. Although diversification is mainly utilized to limit downside performance of an investment, it can also reduce the effect of the positive performance of a great investment. Over-diversification can have the effect of spreading the holdings out too much so that none of the holdings have enough shares to impact the portfolio which ends up resulting in underperformance.

Mutual funds and ETFs are great tools to accomplish diversification in one investment vehicle.

For a diversification analysis of your existing portfolio, including your company-sponsored plans, contact a Trilogy Advisor.

Tags: Investment Techniques
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