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Diversification 231 231

Step 11: Risk Exposure

Solutions Efficient Diversification: The Key To Success A diversified portfolio which captures the right blend of market indexes reaps the benefit of carrying the systematic risk of the entire market while minimizing exposure to the unsystematic and concentrated risk associated with individual stocks and bonds, countries, industries, or sectors. The only risk that remains is the risk of the market itself, a risk that must be taken in order to capture market returns. As capitalism has expanded throughout the world, it has become increasingly important to allocate a significant portion of one’s portfolio to international and emerging markets securities. In the 1970’s, the U.S. comprised more than 68% of global equity value, but today it comprises about 50%93. Investors achieve the benefit of increasing diversification and capturing the expected returns of global capitalism by investing in index funds comprised of international developed countries and emerging markets countries in risk-appropriate doses. An additional important aspect of diversification is diversifying across time. When investors maintain a globally diversified portfolio for long periods of time, they are able to maximize their ability to capture the complete range of returns that are offered by the global markets. Index portfolios with a high exposure to stocks require a longer holding period than fixed income portfolios in order to maximize the probability of achieving an expected outcome.

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