Diversify? Easier Said Than Done

There are three basic ways to manage the risk of an equity portfolio: 1. Diversify, by owning a collection of stocks from different industries 2. Hedge, by shorting stocks or equity futures 3. Buy insurance, like buying an out-of-the-money put option. The essence of diversification is choosing assets that are not perfectly correlated with each other. The logic is simple enough: when one asset zigs, another zags. Years ago, finance scholars proved that a portfolio of securities is less risky than an individual holding and the idea of diversification as a risk management tool was born.