The key to effective diversification is to distribute your investments among appropriate asset classes. For the individual investor, appropriately diversifying investments is complicated because the financial services industry has no standardized vocabulary. Every financial services organization wants to define and sell an asset vehicle that outperforms other asset vehicles. Suppose we market the General Fund, a bundle of common stocks and bonds with the word general in their corporate names. From the NYSE alone, the portfolio includes General Cable, General DataComm, General Dynamics, General Electric, General Mills and General Motors.
Investors participate in diverse services and products from jet engines to oatmeal.
Diversification is a fine idea, but without a coherent means of deciding what investments belong in your investment mix, your portfolio will be random and undirected. Our General Fund is not an asset class. It's a coincidence. The only way to rationally manage diversification is to understand asset classes. Asset Classes Don't be fooled by the apparent complexity of your financial options.