Many investors do not truly understand effective diversification, often believing they are fully diversified after spreading their investment across large-, mid- or small-cap stocks; energy, financial, health care or technology stocks; or even investing in emerging markets. In reality, however, they have merely invested in multiple sectors of the equities asset class and are prone to rise and fall with that market.


  • A high correlation exists between the returns investors achieve on their holdings and the underlying asset class performance of those holdings.
  • True portfolio diversification is achieved through selecting and holding a variety of asset classes, rather than individual stock-picking and market-timing.
  • Ideal asset allocation is not static. Assets’ performance and their correlations to each other change, so monitoring and realignment are imperative.
  • Effective diversification will include asset classes of varying risk profiles held in various currencies.

Ideal asset allocation is not static. As the various markets develop, their varying performance leads to an asset class imbalance, so monitoring and realignment is imperative. Investors may find it easier to divest underperforming assets, moving the investment to asset classes generating better returns, but they should keep an eye out for the risks of overweighting in any one asset class, which can often be compounded by the effects of style drift.