Diversification may be the most misused word in the English language. Being “diversified” does NOT mean owning 60-100 stocks, nor is it owning a couple of different mutual funds. Harry Markowitz, winner of the Nobel Prize in Economics in 1990, said while almost all diversification is good, there still exists effective and ineffective diversification. Simply put, if your assets move in tandem and move up and down together, that is ineffective diversification. Effective diversification on the other hand entails assets with prices moving in opposite directions. Therefore, while one asset is doing poorly, another asset in your portfolio will be doing well. The effectively diversified portfolio provides stability and, hence, a larger long-term return. A truly diversified portfolio is comprised of many asset classes that do not always have the same price movements – for example, between small and large, value and growth, international large and small, international growth and value, emerging markets, and real estate investment trusts (REITs). By definition, the return of the diversified portfolio will never be as good as that of the best performing asset class in a given year, however, it will conversely never be the worst! The volatility will be much smoother and will result in a superior long-term return.
These ideas led the way to Modern Portfolio Theory (MPT), which elaborates, on this theory. MPT states that investments should be chosen based on the importance of the relationship among all of the investments rather than focusing on the individual merits of each investment. Rogers Capital Management, Inc. utilizes and employs these concepts in constructing portfolios for each client. Not only does it yield superior results, but it also provides a better investment experience for the client. Our clients are more likely to understand exactly how much risk he or she has taken on in order to reach their desired return.
