Define diversification and master one of the top investment selection factors of Millionaire investors.
Investors who learn to define diversification will be able to understand one of the most critical investment strategies used by Millionaires - savvy investors who count risk and diversification among their top criteria, according to ongoing research from Spectrem’s Millionaire Corner.
A common way to define diversification is simply “not putting all your eggs in one basket,” or single investment product. Investors with a concentrated position – such as shares of their company’s stock or commercial real estate – risk large losses should that company or economic sector struggle or fail.
Experts at the Financial Industry Regulatory Authority define diversification as the practice of dividing money allocated among asset classes across the various categories, or subclasses, within that asset class. Assets invested in stocks, for example, can be distributed among small, mid-sized or large companies, and among companies working in different sectors of the economy, such as technology and pharmaceuticals.
Find out the sectors Millionaires are likely to invest in this year.
Bond investors may divide assets among different types of issuers, such as federal and municipal governments and corporate borrowers, and among bonds with different maturity dates.
It’s hard to define diversification without discussing the concept of correlation. Positively correlated investments go up and down together, while negatively correlated assets move inversely to each other. “The less positively correlated your investments are with one another, the better diversified you are,” according to FINRA.
Once investors have learned to define diversification, they may consider trying to increase the diversity of their portfolio holdings. Pooled investments – such as mutual funds and exchange-traded funds – can offer investors more diversification then they can typically achieve on their own, according to FINRA.
Mutual funds play a significant role in the portfolios of high net worth Millionaire investors.
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