The ultimate point of diversification is actually risk management.Again, though, this source seems to suggest that the importance of bonds seems to primarily be about risk tolerance and planning for retirement or other goals for wealth.
A stock index fund vs a handful of individual stocks (i.e. increased number of holdings)? That addresses idiosyncratic risk.
Fixed income along with stocks (i.e. multiple asset classes)? That addresses systemic risk.
Risk is not just about an individual's perception of their ability to tolerate volatility. It is about one end (the low end) of the range of potential long-term outcomes falling outside what you need for "success".
With a single stock, the low end of that range is going to zero on your investment. With leverage on a single stock, it's lower.
Diversification into a total stock market index fund gets the low end of the range above that.
And diversification into fixed income gets the low end of the range above that.
Statistics: Posted by bobsmith — Wed Mar 13, 2024 6:47 pm — Replies 51 — Views 2082