Pros and Cons of a Diversified Portfolio

November 17th, 2008

Having a diversified portfolio is having many stocks from different industries and creating security in your portfolio or 401k. Here are a cumulative of pros and cons I have put together to consider diversifying your portfolio.

Pros

1. One or a few poorly performing stocks do not significantly reduce the overall portfolio performance.

2. It requires less active management, with fewer buy and sell decisions, and attendant lower costs.

3. Performance is highly correlated with broad indices, either market or sector, and thus does well in a general up market.

4. Performance will be no worse than the broad market or index.

Cons

1. An excellently performing stock does not significantly improve the performance of the portfolio, and thus large potential gains are missed.

2. Performance is highly correlated with the broad market or sector, and thus does poorly in a down market.

3. Performance will not be better than the broad market or index.

 

Thank you for your time.