While it is true that asset allocation is essential to maximizing risk reduction, few people truly have a properly diversified portfolio. That’s because some financial advisors, and many investors, think that asset allocation simply means owning a lot of different investments. It doesn’t. Keep this in “M.I.N.D.”© - Multiplication Is Not Diversification!
We define diversification as "to balance (as an investment portfolio) defensively by dividing portfolios among different asset types". Most financial professionals and investors diversify their porfolios by purchasing several stocks, mutual funds and perhaps a couple of bonds. This strategy fits the basic definition of diversification, but more needs to be done.
By adding more asset types, you begin to reduce risk at the portfolio level. Many financial planners diversify their client portfolios into stocks or mutual funds before understanding how these investments correlate to each other. Owning several different stocks or mutual funds is an example of horizontal diversification which reduces portfolio risk, but not substantially. Adding additional asset types that are not highly correlated is vital to accomplishing true portfolio diversification.
The M.I.N.D.© Risk Management System follows sound, time-tested investment principles that help build properly diversified portfolios with assets that are not highly correlated to each other. We have developed a macro risk measurement method for identifying risk within a portfolio. If you would like a free Portfolio Risk Score Click here