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The Importance of Portfolio Diversification

Edward Marsi

Based in Manchester, New Hampshire, Edward “Ed” Marsi is a senior financial consultant who provides client-centered advice with TD Ameritrade. Edward Marsi holds FINRA Series 7 and 66 licenses, and has extensive knowledge of investment and retirement planning strategies.

For those with investment portfolios, one of the core mandates is ensuring proper diversification, which has its modern inception in the Nobel prize-winning portfolio theory of Harry Markowitz. A key insight of Markowitz's in the 1950s was that because various investments behave differently, it makes sense to lower variability by selecting classes of assets that are not positively correlated.

When it comes to equities, this may involve selecting stocks in a number of companies that meet varying performance and price parameters, and represent diverse industries. This reduces exposure to a downswing in any particular company, while not costing anything in terms of expected return. For many of high net worth, diversification extends beyond stock returns and includes investments in such areas as commodities and real estate.

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