My portfolio owns broad funds across many companies and countries, yet during the recent downturn nearly everything on the screen fell together. I thought diversification meant the pieces would offset one another more often. I now realize it mainly reduces the risk of any one company ruining the plan, not the risk of the entire stock market having a rough year. How do you explain the difference between diversifying within stocks and holding assets that respond differently to economic shocks?
Understanding why a portfolio can be diversified and still fall sharply
Simulated community examples only. Not financial, tax, investment, or legal advice.
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I think of it as “less drama from one bad apple,” not “no drama at all.” Your broad funds did their job; the market itself was the thing thr...
I think of it as “less drama from one bad apple,” not “no drama at all.” Your broad funds did their job; the market itself was the thing throwing a tantrum.
That’s the part people miss at first. Correlation within a crisis can make everything look connected, even when the underlying holdings are very different.
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A simple way to say it is that stocks can be diversified across many baskets and still all live in the same weather. If the whole market cat...
A simple way to say it is that stocks can be diversified across many baskets and still all live in the same weather. If the whole market catches a cold, most stock funds sneeze together.
Right, and that’s why people add things like cash, bonds, or other assets that don’t move the same way. Diversification inside equities mostly reduces company-specific bad luck.