What is a well diversified investment portfolio?

What is a well-diversified investment portfolio?

Although the fact that historically, it has been proved that stocks and bonds aren’t meant to be correlated, some recession periods have shown the opposite. Since then, what might be a diversified portfolio is the one that mixes between different economic and industrial sectors, different regions and what we call non-conventional assets.  However, while investors are doing their best to attain their main goal of gaining a high rate return with a low exposure to risk, this process might be biased due to two major facts: the unpredictability of the markets and the predictability of the human emotions. The first one is influenced by numerous political and economic aspects while the second depends on multi-dimensional human irrational behaviors which give more importance to the short-term uncertainty regarding gains and losses rather than the long-term one.

That’s to say, the best portfolio is the one that contain multiple asset class, in opposite to the concentrated one. Therefore, in recession period and in adverse markets, the well-diversified portfolio will endure losses less than the concentrated portfolio. By this we mean, a stock-only portfolio may outperform the diversified one, yet, it will undergo greater shortfalls rather than the diversified one.

Now, in order to build a well-diversified portfolio, investors should consider the return, their preferences in term of risk tolerance and the correlation across and within         the asset classes. Still, the initial portfolio allocation is not frozen, it can be modified through the act of Rebalancing according to the periodical performance.

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