The More Ingredients, the Better

This chapter compares the risk-reward characteristics of portfolios with various levels of diversification “breadth” and “depth,” The 7Twelve portfolio is all about diversification. Portfolio diversification reduces portfolio risk. The 7Twelve portfolio is diversified by design. The recipe is all about achieving diversification. A diversified portfolio needs to use diversified ingredients. The 7Twelve portfolio uses 12 different mutual funds that are individually diversified, that is, each individual fund invests in hundreds of different things, such as stocks, bonds, commodities, and so on. This type of diversification represents depth. Each separate component of the portfolio is a diversified basket of stuff. A diversified portfolio needs to invest across many different asset classes—each of which has depth. This strategy represents diversification breadth. Most portfolios lack sufficient breadth because the investors or their advisors assume that diversification depth is all that is needed. The chapter provides a compelling case for diversification depth and breadth. The grand key to the 7Twelve portfolio recipe is diversification breadth.