Harry Markowitz is the 1990 Nobel Memorial Prize winner in Economic Sciences, and a recipient of the 1989 John von Neumann Theory Prize.
Markowitz, who is known as the “father of Modern Portfolio Theory” for his work in portfolio construction, is a member Personal Capital’s Board of Academic Advisors, which works to devise innovative solutions to help millions of Americans reach their retirement goals and better manage their money.
In an interview with Personal Capital, Markowitz was asked, “What are the top pieces of advice you give people about money?”
“I only have one piece of advice: Diversify,” he replied. “And if I had to offer a second piece of advice, it would be: Remember that the future will not necessarily be like the past. Therefore we should diversify.”
Diversification is the technical term for not putting all of your investing eggs in one basket. You may also hear it used more casually, to describe not just a traditional investment portfolio, but how you set up your money overall.
In the investing sense, Charles Schwab portfolio consultant Sean Moore told Business Insider that many investors don’t quite implement the strategy like they should.
A common mistake Moore sees is investors putting together a “collection” of investments rather than a portfolio. “You find that because investors don’t understand what’s going to serve their best big-picture objectives, and they purchase or select investments based on factors like past performance or names they recognise,” he said.
Investing in a handful of mutual funds might seem diverse, he added, but the securities held in the funds may be incredibly similar. This strategy could lead not only to improperly diversified investments, but also to inappropriate levels of risk for your specific situation.
“It’s common to see investors holding funds that all hold securities from the S&P 500 and that’s it, or all technology, or something like that,” Moore said. “That isn’t diversification, because you need to have a wide array of areas you can be successful in as an investor. If one area struggles, there should be other areas you can find success.”
For an illustration of why diversification is so important to your portfolio’s return, take a look at this “quilt” from investment bank Oppenheimer, which breaks out total returns by asset class.
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