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Understanding Diversification

Whether investing for growth or income, all investors should seek multiple layers of diversification in their investment portfolio. The first level of diversification is asset class allocation, where investors diversify their investments among separate asset classes such as stocks, bonds, alternative investments and cash. This is inter-asset class diversification.

The next level of diversification is among the assets within a specific asset class. For example, most investors’ stock portfolios hold stock in numerous companies and sectors, such as owning multiple stocks in the banking sector, the technology sector and the resources sector. This is intra-asset class diversification.

The final (and most often overlooked) level of diversification allows investors to purchase specific investments that diversify internally among numerous holdings. For example, an investor who purchases units in a Real Estate Investment Trust (REIT) that spreads its risk over several apartment buildings, shopping plazas or other income-producing properties receives diversification that is unavailable when only a single property is purchased. This is asset-specific diversification, and this is the focus of virtually all investments recommended by Westcourt.