Portfolio Diversification: Dark Clouds & Silver Linings
Brought to you by PNC Investing and Retirement

Learn what diversification means, how it works, and why it’s the most important rule of personal investing.

Diversification is a viable method for dealing with market volatility.
What causes investments to fluctuate the most?
Diversification helps alleviate the difficult process of predicting a particular savings method’s shift on returns.
A diversified portfolio is made up of stocks from many different types of companies.
Diversification is a way to guarantee your investments make a profit.

Right!

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Diversification Challenge

Take a look at your investment portfolio and determine your current asset allocation. You may want to discuss with a financial advisor if you don't feel comfortable on your own. If you only have one or two types of investments, it may be a good time to diversify. Whether your money is in an IRA, 401(k), or other investment account, you may want to reallocate your money to a mix of stocks, bonds, and other investments that match your goals and risk tolerance.

Session Q & A

  • Strictly interest-bearing savings accounts such as money market accounts are also options, as are funds tied to the prices of commodities such as precious metals, oil, and so on. Funds tied to prices of other things like real estate and foreign currencies are also out there.

  • Here we would be talking about broad tendencies, which cry out for the identification of counterexamples and exceptions. But that said, certain scenarios do tend to trigger opposing responses between certain options. Times of uncertainty and angst that translate into down periods for stocks often coincide with run-ups in prices of precious metals like gold and silver. Inflationary concerns can also trigger increases in precious-metal prices; when these concerns prompt countervailing policy responses in the form of monetary contractions, you could expect coinciding decreases in the price of stocks and bonds.

  • With investments, there is always room for regret after the fact. A well-diversified portfolio will tend not to do as well during a short-term bull market as a portfolio fully invested in stocks. But bull markets don’t last forever, and when reversals occur, the payoffs from diversification tend to be realized. By looking strictly forward, ideal diversification for one person could look insufficient for another, and excessive for another still. Individual circumstances and preferences are critical for defining “ideal”; fortunately there are plenty of options for tailoring portfolios to match individual needs and wants.

  • The market is volatile, so diversification is a method for dealing with this volatility. It means avoiding extreme positions in the market (like investing most of your money solely in stocks, or solely in bonds), and instead moving to a mix of investments that can help balance risks and rewards.

  • Financial advisors and online asset-allocation calculators can help identify the right mix for your unique situation. Diversification strategies, or asset allocations, can vary from person to person and evolve as you get older or your financial goals change. In constructing a diversified portfolio, the ideal mix of assets can depend on how much risk you want to take on, how far away you are from retirement, and various other factors.

David DeJong, PhD

David is a Professor of Economics at the University of Pittsburgh and serves as Vice Provost for Academic Planning and Resources Management. With a PhD from the University of Iowa, he also served as a Visiting Professor in Vienna, Buenos Aires and Kiel, Germany. In 20+ years as a professor, he has written over 40 leading journal articles, coauthored the textbook Structural Macroeconomics, 2nd Ed., and was Associate Editor of the Journal of Business and Economic Statistics. Proud husband, father and manager of a struggling fantasy football team, David is a lousy golfer but an avid sports fan.

David is a Professor of Economics at the University of Pittsburgh and serves as Vice Provost for Academic Planning and Resources Management. With a PhD from the University of Iowa, he also served as a Visiting Professor in Vienna, Buenos Aires and Kiel, Germany. In 20+ years as a professor, he has written over 40 leading journal articles, coauthored the textbook Structural Macroeconomics, 2nd Ed., and was Associate Editor of the Journal of Business and Economic Statistics. Proud husband, father and manager of a struggling fantasy football team, David is a lousy golfer but an avid sports fan.

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