Why Diversification Protects Wealth
Concentration risk is the most common cause of wealth destruction in personal portfolios. When one stock, one sector, or one asset class represents more than 10% of your net worth, a single bad outcome can be catastrophic.
A properly diversified portfolio holds domestic equities, international equities, bonds, and alternative assets. Each behaves differently in different economic environments — smoothing the overall ride.
When stocks fall, bonds often rise. When US markets struggle, international markets may outperform. Low-correlation assets in a portfolio reduce total volatility without proportionally reducing expected returns.
- → Domestic equity — US total market (VTI, FSKAX)
- → International equity — developed and emerging markets
- → Bonds — stability and income, especially near retirement
- → REITs — real estate exposure without direct ownership
- → Rebalance annually — restore target allocations after drift