Portfolio Mismanagement

If the first rule of portfolio management is diversification, why do most investors unwittingly concentrate their risks? Many investors believe that a portfolio constructed with numerous stocks and bonds is diversified. That approach has its roots in the principles of Modern Portfolio Theory (MPT). Yet when MPT is misapplied, it does not provide the roadmap to secure investing and leaves investors vulnerable to substantial risk. This article explores why the strategy of diversification in a portfolio should apply to risks rather than to securities. Most investors have unknowingly folded a significant concentration of risk into their investment portfolios.