Asset Allocation vs. Diversification
January 17th, 2007 by digerati
You often hear the term diversification when discussing your portfolio. You occasionally hear the term “asset allocation” as well. What do they mean (as they apply to your portfolio) and how are they different?
Diversification means having several of the same type of investment. For instance, you diversify stocks by having not only Intel stock, but also having GE and Sunkist stock. Diversify by having stocks not only of several companies buy also of several industries so that if one industry or company has a bad year (decade, century, they become Enron) your entire portfolio isn’t shot.
Asset Allocation means having a variety of types of investments. This means having stocks and bonds. A balanced portfolio will have some stocks (variety of small cap and large cap), bonds (short term and long term), real estate (REITs), and commodities (like gold). Generally dividing assets over these categories will provide a better long term return than investing in only one type.
Xevi Miró-Bruix Says
You know what? I am more into high-risk investment funds. What they try to do is to maximize the high of the reference market or index and minimize the lows. Right now, as you saw on my billioner pictures, i am investing in 4 fields:
- Global Market
- European Small Caps
- Japanese Small Caps
- Asian Markets (excluding Japan)
So far, so good. I dont have time to take care of stocks, so i preffer funds. That is my recomendation for people like me, who know nothing about finances
Jan 18th, 2007 at 4:26 am