The Inside Story About Diversification

Harry Markowitz called diversification "the only free lunch in finance." In this session, part of Paul's series for Next Gen Personal Finance educators, Paul Merriman explains what that means in practice, and why a well-diversified portfolio can help investors stay the course through good markets and bad. Paul covers the history and math behind diversification, from Don Quixote's "don't put all your eggs in one basket" to Warren Buffett, Charlie Munger, and Sir John Templeton. He explains the three kinds of risk investors face (company, market, and asset class), and shows how the "lost decade" of 2000–2009 hit S&P 500 investors hard while more diversified portfolios kept growing. You'll also hear: How adding small "baby steps" of large cap value, small cap, and REITs added about 1% a year to returns since 1970 Why the two-fund strategy (half S&P 500, half small cap value) may be less risky than it looks What a young investor putting away as little as $1,000 a year could build over a lifetime A simple "ultimate buy and hold" for hands-off investors: a target date fund plus a slice of small cap value Plus, Paul shares a free book from market historian Bill Bernstein. Watch on YouTube: youtu.be/MDqaIojI8TE Free book: If You Can: How Millennials Can Get Rich Slowly Tables and research: paulmerriman.com/data-tables Send your questions to Paul at [email protected] (include "NGPF" in the subject line)