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Does Diversifying Still Protect Your Portfolio?

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In the following video, Fool contributor Dan Caplinger discusses how many investors have started to question whether diversification still works as a way to protect your portfolio from downturns. Increasingly, the Dow Jones Industrials (DJINDICES: ^DJI  ) and other markets both in the U.S. and around the world have traded in lockstep, with highly correlated returns threatening the protection that diversification used to provide.

Dan notes that even though returns on various stocks have gotten a lot more highly correlated lately, some stocks move more dramatically than others in response to changing market conditions. By tapping the relative stability of lower-volatility stocks, you can get the benefits of diversification while still having exposure to potential profits from rising markets. Dan gives some good examples of such low-volatility stocks within the Dow for investors to take a look at.

Coca-Cola's wide moat has helped provide its shareholders with superior gains in the past, but does it have the price stability that conservative investors want from a stock? The soft-drink company also faces some new threats to its continued market dominance. To help you figure out how to handle Coca-Cola as an investment, The Motley Fool recently compiled a premium research report containing everything you need to know about Coca-Cola. If you own or are considering owning shares in the company, you'll want to click here now and get started!


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  • Report this Comment On April 02, 2013, at 9:57 PM, mikedever wrote:

    Not only can diversification protect your portfolio, but it is the one true "Free Lunch" of investing, meaning it can provide both greater returns and less risk than a portfolio that is not diversified. But true portfolio diversification cannot be achieved by simply spreading money across stocks. To truly diversify a portfolio it must be diversified across multiple, unrelated "Return Drivers." I describe this throughout my best-seller and am pleased to provide complimentary links to the following two chapters, where I discuss the lack of diversification from spreading money solely across stocks (including correlation tables), as well as the benefits of true portfolio diversification:

    http://bit.ly/utWsNy

    http://bit.ly/vxDo6v

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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