A version of this article was published in the September 2018 issue of Morningstar ETFInvestor. Download a complimentary copy of Morningstar ETFInvestor by visiting the website.
Diversification is an age-old risk-management concept. In its most basic form, it requires an investor to hold multiple assets that are unrelated to each other, thus preventing his portfolio from taking a dive when a single asset is down for the count. In the context of traditional asset classes, this typically means complementing stock investments with other assets like cash or bonds. These assets have low correlations with the stock market. This makes them effective diversifiers, but there is a trade-off, since they typically have lower expected returns.
Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.