Diversification 101

Investopedia defines diversification as “a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event.” Even the most novice investor has heard the phrase, “diversify your portfolio to reduce your risk.”

If you aren’t an investor, it’s very likely you have heard the phrase, “don’t put all of your eggs in one basket,” which suggests avoiding the risk of losing all your eggs if you drop that one basket. To diversify your egg “holdings,” put some in an egg crate and others in a steel box. The basket, crate and steel box will react differently to being dropped. Some of your eggs may survive the fall.

Executives on Wall Street, in the Fortune 500 and beyond understand that financial diversification is important; that there is a value investing in different asset classes because they react differently to negative events. The evidence of that understanding may not be easy to find within corporate financial statements but rest assured it would be readily apparent in their personal portfolios, if we ever had an opportunity to look.

When looking for new trades to execute for the purpose of diversification, there is no expectation for these “new” products or instruments to perform in the same way as the original position. It is expected that they will look and act differently. In fact in many cases, the less correlation the better. Why is it then that the same men and/or companies who seek out diversified holdings for risk management purposes, struggle to apply this same concept to the promotion and retention of women (and minorities)?

If you are looking to diversify your portfolio, you don’t do it by reading pamphlets, attending seminars or slapping some pictures of treasury bonds on your desktop. You do it by booking enough real trades to give you the right amount of offset. You allocate enough credit and capital to sustain the entire position, not just a subset. You manage the position alongside the rest of your portfolio. You don’t trade out of the position when it behaves differently than the rest of your position. When the entire market tanks and your P&L takes a hit, you don’t explain away the losses by attributing them to one set of trades.

Now many of you (and “them”) will roll your eyes and say “but they (we) are committed to diversity!” Yes, there is a smattering of women in senior leadership roles throughout the Fortune 500. And if you want the exact numbers, check the LedBetter Gender Equality Index. But I am talking about true investment and meaningful percentages. Diversity is not about tokens or figureheads; town halls or off sites; training and teambuilding.

It is about setting performance metrics at every management level to build teams with balanced numbers of men, women and minorities.

It is about recruiting from different schools and from different geographic regions.

It is about promoting from within.

It is about having a board as diverse as the promotional videos on your website and recruiting material.

Why is it that we understand this when it comes to investments but are still debating it when it comes to men and women?

It really is Diversification 101.