Diversification is a term that is often discussed, but is still widely misunderstood amongst investors today. When the financial markets collapsed in 2008, many investors were left wondering if the opportunities to truly diversify were fewer than they once believed.
Diversification: Is NOT having your money at four different banks. Many investors still do not understand how FDIC insurance works.
Diversification: Is NOT having your money at four separate financial institutions. Many wealthy investors often believe they spread their diversifications risk by hiring money managers at different brokerage houses. This is hardly ever the case.
Diversification: Is NOT leaving your 401(k)’s at three old employers. It’s extremely scary to see how many people buy the same mutual funds through their 401(k) at different employers and never really look at their investment strategy as a whole.
Diversification: Is NOT necessarily done by buying different mutual funds or exchange traded funds from the same fund family.
Diversification: Is NOT subtracting your age from 100 to get your stock and bond mix.
This obviously isn’t an end all be all list, but hopefully you get the point. Diversification isn’t as simple anymore as the age old adage, “Don’t put all of your eggs in one basket.” You need to make sure more than ever today that the baskets you put your money into will truly reduce your risk while helping to optimize your return because so many baskets may be more alike than you think. Diversification would appear to be an easy task to accomplish and there is no model that will work generically for an investor. Keep a close eye on this one with your portfolio for the future!