Question

Diversification is “combining negatively correlated assets to reduce, or diversify, risk.” Do you think your investments are adequately diversified? Why or why not? What can you apply from this to improve your personal financial health and lower your risk or increase your return?

Answer 1

Yes, I think my investments are fairly diversified. However, there is still scope for improvement to further reduce the downside. But since we know that with higher diversification, the upside of the returns will also dimish, therefore it is a matter of capping the upside while balancing the risk and returns in a portfolio.

On a general level, in order to lower the risks of the portfolio I can utilize the following improvements:

• Increase the proportionate share of Fixed Investments (T-Bills and G-Bonds) in the portfolio
• Reduce the correlate between the portfolio stocks to as low as desired
• For Corporate Bonds, the investment decision should be on the merits of the company and not on the personal opinion about the company's products/services
• The asset classes in the portfolio should mstch the structure of the liabilities so that there is not a shortage of funds whenever required to invest in new asset classes