Investopedia defines diversification as a risk management strategy that creates a mix of various investments within a portfolio. A diversified portfolio contains distinct asset types and investment vehicles in an attempt to limit exposure to any single asset or risk. This definition is well-known and adopted by most investor advisors.
Information is key to making decisions and investors should seek to be as informed as possible in order to make successful decisions. Being well informed requires a diversity of inputs, for example, you should read both the Wall Street Journal and the New York Times. Not only does the reporting on a particular issue vary significantly, but both papers also tend to not report some news items at all, and the so-called news pages have an increasingly editorial flavor. The same logic applies to broadcast news. And then there’s social media and influencers. The amount of misinformation and blatant promotion is staggering. This is not a useful source of investment information. In fact, it may be the optimal method of pooling ignorance.
Unfortunately, no matter how diligently investors pursue a variety of inputs, they still don’t know what they don’t know. Probably the best strategy, given imperfect knowledge, is diversification.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
