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What Is Diversification? Definition, Strategies & Examples

What Is Diversification in Investing? In finance and investing, diversification is a popular term for mitigating risk by dividing one’s investments between a variety of asset classes and investment vehicles. Diversification also refers to dividing one’s..

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A diverse portfolio can help minimize losses during times of volatility and financial uncertainty. 

Simone Hutsch via Unsplash; Canva

What Is Diversification in Investing?

In finance and investing, diversification is a popular term for mitigating risk by dividing one’s investments between a variety of asset classes and investment vehicles. Diversification also refers to dividing one’s investments within each asset class.

For instance, In addition to diversifying their portfolio by investing in stocks, bonds, real estate, certificates of deposit, and collectible baseball cards, an investor could further diversify their portfolio within the stock asset class specifically by investing in small, mid, and large-cap companies; buying stock in both domestic and foreign companies; and choosing a variety of stocks that span many different industries (e.g., banking, technology, automotive, food production, and energy).

How Does Diversification Mitigate Risk?

No investment is perfectly safe, but some carry far less risk of loss than others. For instance, government bonds are considered extremely safe, as they carry very little default risk. That being said, government bonds usually only yield a 3–6% return each year. The S&P 500, which is composed of 500 large-cap stocks, on the other hand, returned 31.5% in 2019 and 18.4% in 2020. Back in 2008, however, the same stock index lost 48% of its value due to the financial crisis and subsequent recession.

If an investor put 100% of their savings in the stock market in early 2007, they may have reduced their wealth by almost half by the end of 2008. If they had invested half of their savings in government bonds, however, they would likely have lost closer to a quarter. This is a perfect illustration of the benefits of diversification. While diversification by no means provides the largest gains, it certainly helps minimize the losses that can occur when a single asset or single asset class loses value quickly for some reason or another.

The 2008 financial crisis crashed the entire stock market, but more minor events often have more subtle consequences. For instance, people travel far less frequently during pandemics. The onsets of SARS, swine flu, and COVID-19 all led to notable drops in airline stock prices. If at any of these moments in time, an investor was holding only airline stocks, their portfolio would have lost significant value quickly. An investor with a diversified portfolio, however (let’s say one composed of only 5% airline stocks with the rest divided across many industries), would have sustained a far less noticeable loss.

Diversification can perhaps be best explained with the classic adage, “don’t put all your eggs in one basket.” If the bottom falls out of your basket, and your basket contains all 10 of your eggs, you end up with a yolky mess and nothing to eat. If, on the other hand, you divide your 10 eggs between five baskets and the bottom falls out of one, you’ve lost 20% of what you had, but you still have enough leftover to make four two-egg omelets, so you won’t go hungry.

What Is an Asset Class?

An asset class is a type of investment defined by certain characteristics. Each asset class is a little different, and some are riskier than others. Generally, the safer an asset class is, the lower its potential returns are. The riskier an asset class is, the higher its potential returns (and losses) are. Each asset class is subject to its own unique set of features and regulations, and some assets are more liquid (easier to convert to cash) than others.

Common Asset Classes

  • Fixed-Income Investments: This asset class includes treasury, corporate, and municipal bonds as well as certificates of deposit.
  • Equities: This asset class includes stocks, which represent partial ownership of an entity. Historically, equities produce higher returns than other asset classes, but they also carry more risk.
  • Derivatives: This asset class includes options, swaps, futures, forwards, and other tradable securities whose values are derived from other underlying assets.
  • Commodities: This asset class includes physical materials like gold, crude oil, and corn.
  • Cryptocurrencies: This asset class includes digital, decentralized currencies like Bitcoin, Ethereum, Litecoin, and Dogecoin.
  • Cash and Cash Equivalents: This asset class includes currencies, money market instruments, and highly liquid short-term securities that could be converted to cash very quickly.
  • Alternative Investments: This asset class includes real estate and collectibles such as trading cards, stamps, mineral specimens, and art.
There are many ways a diverse portfolio can look—the above is just one possible example. 

Armando Arauz via Unsplash; Canva

How to Diversify a Portfolio

Diversification looks different for every investor, and some take diversification a lot more seriously than others. How (and how much) an investor should diversify their portfolio should depend on how much money they have to invest, how long they want to be invested for, what their investment goals are (retirement, growth, fixed income payments, etc.), and their individual risk tolerance.

That being said, there are a number of things any risk-conscious investor can do to diversify their portfolio. Keep in mind, however, that while diversification definitely reduces risk, it can also reduce potential returns.

Inter-Class Diversification

The best way to safeguard savings from serious loss without leaving them to languish in a low-interest savings account is to divide them among different asset classes. The equity (stock) market may be the best asset class for growth, but as evidenced by the 2007–2008 financial crisis, stocks can be subject to rapid, unexpected, market-wide devaluation.

For this reason, investing in treasury bonds, certificates of deposit, real estate, and even commodities like gold can be a good way to safeguard some of one’s wealth from unexpected volatility. Just how much of someone’s wealth should be kept in these safer, more stable asset classes depends—as always—on goals, timeline, and risk tolerance.

A young, risk-tolerant investor who wants to see their portfolio grow significantly in value and plans to stay invested for 20+ years might want to keep 80 percent of their wealth in equities, while an older, soon-to-be-retired investor whose priorities are stability and fixed income payments might want to keep 50 percent of their wealth in dividend-paying equities, 35 percent in bonds of various terms, and 15 percent in commodities.

Diversification Methods Within the Stock Market

In addition to diversifying by spreading wealth between asset classes, investors can (and usually should) diversity within the equity market by owning different stocks with different characteristics. There are a number of ways to do this:

  • By Industry/Sector: As mentioned above, investing in only one industry can expose an investor to unnecessary risk, as entire industries can experience volatility. For instance, when the “dot com” bubble burst in the early 2000s, internet-related technology companies lost almost 80 percent of their value. By holding stocks across a variety of industries and sectors, investors can protect some of their wealth from these sorts of industry-wide crashes.
  • By Company Size: Another way to diversify within the equity market is by investing in companies of different sizes. Companies with larger market caps tend to be more stable, but companies with smaller market caps may have more room for growth. Spreading investments across small, mid, and large-cap stocks is a good way to balance growth potential with stable returns.
  • By Company Location: Investing in companies from a number of different countries allows for exposure to multiple markets, which can help mitigate risk. If one market experiences volatility, owning businesses that operate in other, more currently stable markets can help offset any short-term losses.

How to Diversify With Mutual Funds and ETFs

For more passive investors who want to diversify but don’t have the time to pick individual stocks, buying ETF shares and investing in mutual funds can be a great way to gain exposure to companies of various sizes from a variety of industries located in different markets. ETFs and mutual funds exist for almost every characteristic imaginable. One ETF might focus on small-cap U.S. growth stocks, while another might be designed to capture the Indian energy market.

An investor might first decide what markets, company sizes, and industries they are interested in, then identify a range of ETFs and mutual funds to match. Next, they could decide on a reasonable amount to invest each month and use dollar-cost averaging to add to their portfolio on a regular basis without watching the market particularly closely.

Do Diverse Portfolios Perform Better During Recessions?

During a recession, money tends to move out of the equity market and into safer asset classes like bonds and commodities. For this reason, portfolios with a higher proportion of these more stable assets are likely to sustain smaller losses than portfolios consisting primarily of stocks. That being said, it is impossible to time a recession, and keeping all of one’s money out of the equity market in case a recession is around the corner isn’t a very good investment strategy for anyone seeking to grow their wealth efficiently.

What Are the Limitations of Diversification?

What makes diversification effective as a risk-management strategy can also make it somewhat limiting in terms of growth potential. With greater risk come greater potential returns. The more of an investor’s money is in one asset, the more they stand to gain if that asset skyrockets in value (and, on the other hand, the more they stand to lose if it tanks). Diversification limits both gains and losses. 

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International

Beloved mall retailer files Chapter 7 bankruptcy, will liquidate

The struggling chain has given up the fight and will close hundreds of stores around the world.

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It has been a brutal period for several popular retailers. The fallout from the covid pandemic and a challenging economic environment have pushed numerous chains into bankruptcy with Tuesday Morning, Christmas Tree Shops, and Bed Bath & Beyond all moving from Chapter 11 to Chapter 7 bankruptcy liquidation.

In all three of those cases, the companies faced clear financial pressures that led to inventory problems and vendors demanding faster, or even upfront payment. That creates a sort of inevitability.

Related: Beloved retailer finds life after bankruptcy, new famous owner

When a retailer faces financial pressure it sets off a cycle where vendors become wary of selling them items. That leads to barren shelves and no ability for the chain to sell its way out of its financial problems. 

Once that happens bankruptcy generally becomes the only option. Sometimes that means a Chapter 11 filing which gives the company a chance to negotiate with its creditors. In some cases, deals can be worked out where vendors extend longer terms or even forgive some debts, and banks offer an extension of loan terms.

In other cases, new funding can be secured which assuages vendor concerns or the company might be taken over by its vendors. Sometimes, as was the case with David's Bridal, a new owner steps in, adds new money, and makes deals with creditors in order to give the company a new lease on life.

It's rare that a retailer moves directly into Chapter 7 bankruptcy and decides to liquidate without trying to find a new source of funding.

Mall traffic has varied depending upon the type of mall.

Image source: Getty Images

The Body Shop has bad news for customers  

The Body Shop has been in a very public fight for survival. Fears began when the company closed half of its locations in the United Kingdom. That was followed by a bankruptcy-style filing in Canada and an abrupt closure of its U.S. stores on March 4.

"The Canadian subsidiary of the global beauty and cosmetics brand announced it has started restructuring proceedings by filing a Notice of Intention (NOI) to Make a Proposal pursuant to the Bankruptcy and Insolvency Act (Canada). In the same release, the company said that, as of March 1, 2024, The Body Shop US Limited has ceased operations," Chain Store Age reported.

A message on the company's U.S. website shared a simple message that does not appear to be the entire story.

"We're currently undergoing planned maintenance, but don't worry we're due to be back online soon."

That same message is still on the company's website, but a new filing makes it clear that the site is not down for maintenance, it's down for good.

The Body Shop files for Chapter 7 bankruptcy

While the future appeared bleak for The Body Shop, fans of the brand held out hope that a savior would step in. That's not going to be the case. 

The Body Shop filed for Chapter 7 bankruptcy in the United States.

"The US arm of the ethical cosmetics group has ceased trading at its 50 outlets. On Saturday (March 9), it filed for Chapter 7 insolvency, under which assets are sold off to clear debts, putting about 400 jobs at risk including those in a distribution center that still holds millions of dollars worth of stock," The Guardian reported.

After its closure in the United States, the survival of the brand remains very much in doubt. About half of the chain's stores in the United Kingdom remain open along with its Australian stores. 

The future of those stores remains very much in doubt and the chain has shared that it needs new funding in order for them to continue operating.

The Body Shop did not respond to a request for comment from TheStreet.   

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Government

Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

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Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

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Government

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

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