You can read in my piece from today that “everyone wishes for preservation of principal and growth.” They want safety and the rewards for risk-taking. That sounds a lot like having your cake and eating it too.
When you look at my chart of the Efficient Frontier, you can see that since 2000, if you aimed to achieve the highest return (100% stocks), you also took on the highest amount of risk (horizontal axis). This is true along most of the Efficient Frontier, where more return demands more risk-taking.
But, the little hook on the left, where you begin diversifying away from 100% bonds and adding stocks shows you that diversification can actually increase return while lowering risk. That’s why Harry Markowitz, creator of the Efficient Frontier, called diversification “the only free lunch in investing.” So, in a small way, you can have your cake and eat it, too.
Action Line: When you want to talk about diversification in your portfolio, email me at ejsmith@yoursurvivalguy.com. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
