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Why Diversification Lowers Investing Risk

Charley Ellis of the Rebalance IRA Investment Committee on how diversification lowers investing risk by removing guesswork from investing.

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Diversification says, “I don’t know everything. So I can’t make really smart decisions on specific pieces.” Give you an example….weather. Could you promise me that the 13th day of October is going to be a decent day, that there won’t be a rainstorm?

I can’t promise that sort of thing to you. And I’ll bet you can’t promise it to me. Well, diversification takes you towards climate and away from weather. Diversification takes you toward the normal experience.

And diversification protects you from the unique, dreadful whoever thought that something like that would happen to a nice person like me. One of the great phrases about diversification that Burt Malkiel uses over and over and over again, “It’s the only free lunch in all of investing. Costs nothing to have it. And it’s enormously valuable.”

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