The Value And Benefits Of Diversification

784 Words May 5th, 2016 4 Pages
To many investors and advisors, diversification is a forgone conclusion when constructed a portfolio. The value and benefit of diversification have been long held principles in the class room and the real world. The mix of stock and bonds helps balance the risk and rewards of investing, with equities designed to deliver robust returns and bonds intended to offset stock volatility. The entire concept is fundamental to basic investment strategy but fell short during the 2008 Financial Crisis. The problem during this period is that asset prices for both stocks and bonds moved in the same direction, down. When stocks and bonds move in the same direction, investors can experience volatility in their portfolios. This is particularly detrimental during times of crisis and extreme downside movements.

Good thing is, factor investing has been the latest effort to address the shortcomings of basic diversification. For institutional investors, who can afford large down periods, factor investing is the optimal balance between risk and returns. Factor Investing, by definition, is an investment strategy in which securities are chosen based on aspects that are associated with higher returns. The MSCI currently identifies 6 key risk factors: Value, Size, Volatility, Yield, Quality and Momentum. Historically, this combination has academically and empirically proved to “safely” outperform the market in the long term.

Basics of Factor Investing

As the investment universe has grown beyond…
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