sector and the general Retail sector is more stable than the correlation between IBM and Wal-Mart stocks. But, just like we saw in the financial crisis of late 2008, large market events tend to take all sectors of the equity market down in price, not just a few sectors. So, we shouldn’t be overly dependent on the correlation between equity (stock) sectors, and are much better off diversifying by owning various asset classes (i.e. stocks, bonds, commodities, etc.).
Diversification isn’t a function of the number of securities in a porftolio. Too often I’ve seen investment advisors telling their clients the way to obtain more diversification is to purchase more stocks and bonds different from the ones that the investor already owns. While this is generally true, it misses the point and leads to poor investment decisions. For example, a huge company like IBM is already diversified to an extent. That’s because IBM has multiple business units providing different products and services in various geographies around the world. IBM is diversified across product lines, across the Information Technology supply chain (the chain of product or service flows throughout an industry) and across geographies. So, owning IBM is just like owning a collection of mid-sized businesses in the IT sector. The main difference is that IBM’s creditors (banks and bondholders) generally have recourse to the entire entity, so if one business unit performs poorly the other business units have to pay off the debt, but otherwise it’s already diversified. On the other hand, a small business that owns three fashion jeans stores located in Seattle is not diversified. It’s concentrated in one type of product, in one segment of the supply chain and