Center For Retirement Investing

The Center for Retirement Investing helps everyday Americans do a better job of managing their retirement investments. Ivy League professors translate the complexities of modern investing into easy-to-understand concepts and actionable advice.

How Diversification Lowers Risk In Your Portfolio

Jay Vivian of the Rebalance Investment Committee on how diversification lowers risk in your retirement portfolio.

Diversification is a particularly good thing if you don’t have perfect knowledge as to how individual stocks are going to perform in the future. If you know what stock is going to perform the best do not diversify. You should invest it all in that one stock that you’re guaranteed will do well. But I think it’s pretty unlikely you’re going to know that.

What diversifying does is it lets you spread the risk so that you don’t have any one stock that’s 2% or 5% or 20% of your portfolio to go down the tubes. So asset allocation, again, is the high-level asset class target weights that you’ve got. Diversification is the idea that within an asset class you want to be well diversified so you’re not subject to the risk of any one of those investments in that portfolio going south.