Diversification across asset classes reduces risk from "summary" of All About Asset Allocation, Second Edition by Richard Ferri
When constructing a diversified portfolio, it is important to understand that different asset classes have different risk and return characteristics. By spreading investments across various asset classes such as stocks, bonds, real estate, and commodities, an investor can reduce the overall risk of their portfolio. This is because each asset class responds differently to market conditions and economic factors. Stocks, for example, tend to have higher volatility compared to bonds. During periods of economic growth, stocks may outperform bonds, but during downturns, stocks may experience significant losses. Bonds, on the other hand, are typically more stable and provide income through interest payments. By holding a mix of both stocks and bonds, an investor can mitigate the risk associated with any one asset class.
Furthermore, adding alternative asset classes like real estate and commodities to a portfolio can provide additional diversification benefits. Real estate investments, such as REITs, can offer a hedge against inflation and generat...
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