Ken Fisher Explains How to Build a Well Diversified Portfolio

Is your portfolio properly diversified? In this video, Ken Fisher examines the fundamentals of portfolio diversification and why it matters for your retirement portfolio. To build a diversified portfolio, consider the core concept of Harry Markowitz’ Modern Portfolio Theory (MPT). According to MPT, you achieve diversification by blending multiple securities with negative short-term correlations but similar long-term return expectations. In practice, a diversified portfolio should blend securities from a broad range of market sectors and categories—this generally results in lower volatility because as one goes up, another might go down. Ken Fisher states that when it comes to stocks, no category should have superior returns forever. As one category gains notoriety for superior returns, the market will create new supply within that category to meet increased investor demand. This will eventually bring the category back in line with the broader market. In short, Ken purports that stock returns from different categories and sectors tend to even out over long periods. According to Ken Fisher, in order to build a diversified portfolio, you should mirror a global index. From there, you can choose to overweight sectors or countries you think will outperform and underweight categories you believe will underperform—but be careful! Ken Fisher warns investor overconfidence can have detrimental impacts to long-term portfolio returns. In order to perform better than a broad index, you must know something the market hasn’t already priced in. Want to learn more about portfolio diversification? Read our article on the risks of overdiversification: https://www.fisherinvestments.com/en-us/retirement/investing-for-retirement/retirement-asset-allocations/retirement-diversification   You can also connect with us on: Facebook - https://www.facebook.com/FisherInvestments Twitter - https://twitter.com/fisherinvest LinkedIn - https://www.linkedin.com/company/fisher-investments Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice.