While equities may offer the greatest returns one year, fixed-income instruments may dominate the next. A well-diversified portfolio can help cover all the bases. In the short-term, it is possible that investors will miss out on high returns because their money is tied up in low-risk assets. Ending up with investments that are too low risk or too high risk can have equally disappointing consequences. Bonus withdrawal can be a subject to additional commission. We can recommend Capital. Learn to trade The basics.

Portfolio diversification: What are the pros and cons? By Connor Sephton. Portfolio diversification strikes a balance between low-risk and high-risk holdings Portfolio diversification involves ensuring that your cash is spread out across a multitude of investments. Why diversification is important Portfolio diversification helps investors weather the storm of turbulence in the markets. Savvy companies know how to make diversification a learning experience.

They see how new businesses can help improve existing ones, act as stepping-stones to industries previously out of reach, or improve organizational efficiency. Interestingly, few executives voiced concern about the risks of unbundling competencies and applying them in different combinations in new markets.

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Indeed, I find it useful to think of interrelated competencies as organisms living in a symbiotic relationship within a particular environment. You cannot separate them and move them elsewhere and expect them to flourish as usual, just as you cannot take the engine out of an airplane and expect it to fly. To put it in more practical terms, if a company plans to break apart, recombine, and relocate its strategic assets, it also must be prepared to create a hospitable new environment for them.

Until the s, SMH was primarily in the business of selling expensive watches to wealthy individuals through jewelers and specialist distributors. Its primary strategic assets were patented knowledge of ultrathin, precision-movement technology, knowledge of process automation, and a reputation for Swiss quality. That cluster, however, was inadequate for competing in the mass market, which required large-scale distribution, cutting-edge designs, and additional purchasing skills.

Advantages And Disadvantages Of Concentric Diversification Strategy In Business

To overcome that problem, SMH acquired design skills from scratch by establishing the Swatch Design Lab in Milan, which employs artists, designers, and architects from all over the world. At the same time, it developed the required purchasing skills in-house. To gain better distribution, SMH entered into a joint venture with another company, Bhamco. Finally, it combined its new strategic assets with its existing competence in precision-movement technology.

Even if companies storm into new markets with all the required competencies—put together in the right combination—they still can fail to gain a foothold. To achieve a sustainable advantage, diversifying companies need to create something unique. In other words, there is no point rushing into a new market unless you have a way to beat the existing players at their own game.

Take the experience of Japanese consumer-goods giant Kao. In the late s, Kao introduced the technology into its detergent division, where it quickly was a major success, allowing the company to create a new kind of laundry detergent. The detergent, called Attack, was protected by 91 patents. Hoping to build on that success, Kao then transferred the same technology to its floppy-disk division. The effort was not as successful. Simply put, the technology changed and improved the laundry detergent business, but it was old news in the floppy-disk business: competitors either had something similar to it already or had another technology that did the job.

A three-part acid test can help. First, managers should ask if the strategic assets they intend to introduce into a new market are rare. For example, Laker Airways soared in the packaged-vacation business from to on the basis of its low-cost, low-price strategy.

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But in the mids, when Laker tried to diversify into the transatlantic scheduled-airline business, it bumped into British Airways and the large U. British Airways, for example, used its reservations systems and skills in predicting the volume of passengers on flights to offer similar bargains. Laker went bankrupt in Second, managers should ask, Can the strategic asset be imitated?

Diversification Definition

Despite the numerous companies paying lip service to those ideals, very few can build and sustain success in the way 3M has. Third, managers need to ask whether the strategic asset they plan to export can be substituted. Of course, no company will intentionally diversify into an industry in which it will lose money. But managers considering a new market venture must decide how much money they want to make. For shareholders, being a contender is not enough.

They seek winners, and winning is about unique and competitively meaningful strategic assets. Forward-thinking managers not only will be concerned with success in new markets, but, like good chess players, also will be thinking two or three moves ahead.

They will ask themselves a final question when considering a diversification move: What will we learn by entering a new business, and will it serve as a strategic stepping-stone to help us enter yet other businesses? Often, companies can use what they have learned from one diversification move to enter a third market more quickly and cheaply. For example, by diversifying into the copier business, Canon learned how to build a marketing organization targeted to business customers and how to develop and manufacture a reliable electrostatic-printing engine.

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As a result, when Canon diversified into the laser printer business—which required the same competencies—it was able to move with speed and ease. Managers also should examine whether a diversification move will allow them to learn competencies that can be reapplied in their existing businesses. For example, when Canon entered the laser printer business, it developed the capabilities required to support the design, manufacture, and service of sophisticated electronics. The company then took this knowledge and applied it to its photocopier business, vastly improving the electronic controls that allow its machines to count copies and sense paper jams.

Last, managers should ask themselves if their organization is doing all it can to transfer relevant information and competencies from one line of business to another. For such a flow to take place, companies need to have processes that facilitate and promote learning across different functions and divisions. Indeed, even though the company ranks fortieth in Denmark in terms of the size of deposits, it has ranked number one in industry profitability in five of the last seven years.

Diversification will never be an easy game, and managers must study their cards carefully.

The Advantages of Diversification

See Michael E. Collis and Cynthia A. Over the long term, diversified portfolios do tend to post higher returns see example below. Smart beta strategies offer diversification by tracking underlying indices but do not necessarily weigh stocks according to their market cap. ETF managers further screen equity issues on fundamentals and rebalance portfolios according to objective analysis and not just company size.

While smart beta portfolios are unmanaged, the primary goal becomes outperformance of the index itself.

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Say an aggressive investor who can assume a higher level of risk, wishes to construct a portfolio composed of Japanese equities, Australian bonds, and cotton futures. With this mix of ETF shares, due to the specific qualities of the targeted asset classes and the transparency of the holdings, the investor ensures true diversification in their holdings.

Also, with different correlations, or responses to outside forces, among the securities, they can slightly lessen their risk exposure. For related reading, see " The Importance Of Diversification ". Portfolio Management. Risk Management. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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Your Practice. Popular Courses. Investing Portfolio Management. What Is Diversification? Key Takeaways Diversification is a strategy that mixes a wide variety of investments within a portfolio. Portfolio holdings can be diversified across asset classes and within classes, and also geographically—by investing in both domestic and foreign markets.