If I have a 401k what does diversify mean. How do you know if your truly diversified?

Answer 1

Good Question. Actually diversification is very important and is overlooked. Diversification can be a simple concept. There is the broad view and micro view, both need to be utilized. The broad view is owning some equity (such as stocks or equity mutual funds) and some fixed income (such as a bond, CD) Also the other broad view is domestic and international. You want some of both depending upon which market you think will move forward.
Than there is the micro view that is important. First fixed income. there is short term, intermediate and long term all three can be important depending upon what interest rates are doing.
The micro side to equity is Growth and Value investing than large, mid and small.
I know their seems like a lot to diversification, but once you get this concept down it is very easy to figure out.
Harry Markowitz (as one answer indicated earlier) actually stated that 90% of a portfolios return can be attributed to diversification with the other 10% to investment selection, market timing and other factors.
The best program I have seen to truly see your diversification is on morningstar.com. You can enter in all you investments and they will give you a break down. It will also show overlap in your portfolio. Just because you have two different mutual funds, the funds could invest in the same stocks, this is overlap.

Answer 2

Diversification is misunderstood by many, including financial professionals. The essential idea is that if you own a variety of stocks, you can diversify away certain kinds of risks, in particular, company risk, i.e...that any particular company you own stock in will do poorly, or even go out of business. By owning stocks in different industries, you diversify away some industry risk--the risk that a particularly industry will do poorly. Diversification won't help you avoid systemic risk: the risk that the market as a whole will go down.

How much diversification is necessary? Harry Markowitz's 1950's era paper that described the importance of diversification says that you can achieve more than fifty percent of the benefits available through diversification by owning eight stocks in different industries. Many mutual funds own hundreds of stocks, and must own at least twenty, so the industry has decided that more diversification is always better, even though you get a lot less bang for the buck after you own thirty stocks or so in different industries.

Most 401-(k) options are going to be highly diversified. You're probably better off purchasing index funds that track a broad index such as the S & P 500 or the Wilshire 5000 if those are available. You're plenty diversified if you are in that sort of mutual fund. Don't expect to make a killing in your 401-(k). If your company matches a significant portion of your contribution--say six percent--and you can do as well as the market by investing in a broad based mutual fund (an index fund if possible), then you're doing very well.

Answer 3

Diversification mixes many different asset types so that your not overloaded in one specific area. An example of not being diversified was when the Enron employees had all their money in their company stock. By diversifying you alleviate the risk that is inherit with having all your eggs in one basket.

Answer 4

Diversify means to spread your money out among many different stocks and funds so that you are not counting on one source. If that one source were to crash you would lose everything. It is better to spread it out over many things, that way if one fund goes down, at least there is a chance that it will be made up in a different fund.

Answer 5

Pick a balanced fund. This is a fund that is alredy diversified and automatically rebalances and adjusts based on market expectations and climate. Put all of your money there.

Answer 6

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Answer 7

HUH????