Portfolio

Diversification
PRESENTED BY:-
MUDASSAR HUSAIN
ROLL NO. 19MBAK23
ASIM ABID
ROLL NO. 19MBAK61
Portfolio
Diversification
DIVERSIFICATION IS A BATTLE CRY FOR MANY FINANCIAL
PLANNERS, FUND MANAGERS, AND INDIVIDUAL
INVESTORS ALIKE. IT IS A MANAGEMENT STRATEGY THAT
BLENDS DIFFERENT INVESTMENTS IN A SINGLE
PORTFOLIO. THE IDEA BEHIND DIVERSIFICATION IS THAT
A VARIETY OF INVESTMENTS WILL YIELD A HIGHER
RETURN. IT ALSO SUGGESTS THAT INVESTORS WILL FACE
LOWER RISK BY INVESTING IN DIFFERENT VEHICLES.
 
We should remember that investing is an art form, not a
knee-jerk reaction, so the time to practice disciplined
investing with a diversified portfolio is before
diversification becomes a necessity. By the time an
average investor "reacts" to the market, 80% of the
damage is already done. Here, more than most places, a
good offense is your best defense, and a well-diversified
portfolio combined with an investment horizon over
five years can weather most storms.
Five tips for diversifying Portfolio

(1). Spread the wealth :-

Equities can be wonderful, but don't put all of your
money in one stock or one sector. Consider creating
your own virtual mutual fund by investing in a
handful of companies you know, trust and even use
in your day-to-day life.
(2). Consider Index or Bond Funds

 You may want to consider adding index funds or fixed-income funds to the

mix. Investing in securities that track various indexes makes a wonderful
long-term diversification investment for your portfolio. By adding some
fixed-income solutions, you are further hedging your portfolio against
market volatility and uncertainty. These funds try to match the performance
of broad indexes, so rather than investing in a specific sector, they try to
reflect the bond market's value.
 These funds are often come with low fees, which is another bonus. It
means more money in your pocket. The management and operating costs
are minimal because of what it takes to run these funds.
(3). Keep Building Your Portfolio

 Add to your investments on a regular basis. If you have $10,000

to invest, use dollar-cost averaging. This approach is used to help
smooth out the peaks and valleys created by market volatility.
The idea behind this strategy is to cut down your investment risk
by investing the same amount of money over a period of time.
 With dollar-cost averaging, you invest money on a regular basis
into a specified portfolio of securities. Using this strategy, you'll
buy more shares when prices are low, and fewer when prices are
high.
(4). Know When to Get Out

 Buying and holding and dollar-cost averaging are sound

strategies. But just because you have your investments on
autopilot doesn't mean you should ignore the forces at work.
 Stay current with your investments and stay abreast of any
changes in overall market conditions. You'll want to know
what is happening to the companies you invest in. By doing
so, you'll also be able to tell when it's time to cut your losses,
sell and move on to your next investment.
(5). Keep a Watchful Eye on Commissions

 If you are not the trading type, understand what you are
getting for the fees you are paying. Some firms charge a
monthly fee, while others charge transactional fees. These can
definitely add up and chip away at your bottom line.
 Be aware of what you are paying and what you are getting for
it. Remember, the cheapest choice is not always the best. Keep
yourself updated on whether there are any changes to your
fees.
Six type of diversification to
include in Portfolio
 Here are six forms of diversification that you should include
in your portfolio.
 Diversification is a risk management strategy that mixes a
wide variety of investments within a portfolio. A diversified
portfolio contains a mix of distinct asset types and
investment vehicles in an attempt at limiting exposure to
any single asset or risk
1. Individual Company
Diversification
 It’s easier now than ever before to get a diversified allocation to
stocks through a bevy of different index funds. This wasn’t always
the case. In the 50’s, Nobel laureate Harry Markowitz demonstrated a
portfolio’s risk dropped considerably as additional stocks were added
to the portfolio—even if the individual stocks were all of equal risk.
More recently, research by Longboard Asset Management revealed
that over the period from 1983-2006 nearly 2 in 5 stocks
actually lost money (39%), almost 1 in 5 lost at least 75% of their
value (18.5%) and 2 in 3 underperformed the Russell 3000 index.
Furthermore, the best 25% of all stocks over this period accounted
for nearly all the gains.
2. Industry Diversification
 Just like getting a mix of individual companies is an important way
to diversify your portfolio, having a balance across the multiple
different industries in the economy is important too. It’s especially
important to remember to diversify away from the industry with
which you are most familiar. For example, just like with the home
country bias, people also tend to overweight their home industry. The
chart shows in those living in the West tend to overweight
Technology, as many are familiar with the tech companies based here
or are directly working in the industry. The Northeast favors
Financials, the Midwest Industrials, and the South, Energy.
 3. Asset Class Diversification
 Different assets (Stocks, Bonds, Cash, Real Estate,
Commodities) are going to perform differently in various
economic environments. For example, during an
economic recovery stocks will likely perform well while
in a recession bonds provide protection. Commodities,
TIPS or cash, can protect against the forces of inflation
while during a deflationary environment long-term bonds
are often the best investment.
4. Strategy Diversification
 Within asset classes there are different strategies to get the exposure
—many of these different strategies (also called factors, risk factors,
smart beta, etc.) have been shown in the academic research to deliver
superior returns over time versus a market-cap weighted index. But,
this outperformance doesn’t happen every year, and there can be long
periods of underperformance.
 For most, the best approach is a mix of these factors (Value, Small-
cap, Momentum, High Quality, etc.) with the realization that you
won’t have 100% allocated to the hot strategy, but that you also
won’t be 100% committed to a strategy that’s lagging.
5. Geographic Diversification
 Again, most investors have a “home country bias” preferring the
stocks of companies based in their home country. However, the
research also shows a benefit to diversifying internationally. For an
example, think about the performance of the Japanese stock market
since it’s 1989 peak.
 6. Time Diversification
 Also called Dollar-Cost averaging, if you’re still contributing to your
investment accounts, it can reduce the impact of poor investment
behavior (a lack of discipline) or unlucky timing. While the research
shows that around 70% of the time investing a lump sum is better than
investing it over time, dollar-cost averaging or any rules-based,
disciplined approach, can lead to better investor behavior and therefore
better investment results.
Advantage of portfolio
diversification
Makes Your Portfolio Better Shock-Proof

Better Weather Market Cycles

Enhance Risk-Adjusted Returns

Leverage Growth Opportunities Present in Other Sectors

Provides Stability and Peace of Mind

Disadvantage of portfolio
diversification
Go Overboard

Tax Complications

Risk of Investing in an Unknown Asset

Can Make Investments Complicated

Missed Windfalls
Thank you