The great diversification myth

Is buying a stock to improve your portfolio diversification a sensible idea? It sounds like it. Well-diversified portfolios lower risk by narrowing the range of potential outcomes. And owning stocks in different sectors is a good way to achieve that goal. Your broker will almost certainly agree. ‘You have to own the banks’, he’ll say, ‘because they account for 30% of the market’. Your financial advisor will sing the praises of diversification, too. Trouble is, they’re letting diversification – rather than value – drive the buying decision. Let’s assume you asked your broker for stock ideas late last year. After...

Is buying a stock to improve your portfolio diversification a sensible idea?

It sounds like it. Well-diversified portfolios lower risk by narrowing the range of potential outcomes. And owning stocks in different sectors is a good way to achieve that goal.

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