Is diversity good for investing?
From exit success rates to higher returns on investments, multiple studies have shown that diversity impacts and improves investments' financial performance.
Diversity in investments works with risk allocation rules associated with each investment, as investing in different assets and industry solutions will spread risks on your capital. As that work to preserve an investor from significant losses that could happen in a particular investment or industry.
Diversification can help investors mitigate losses during periods of stock market and economic uncertainty. Different asset classes and types of investments perform differently at different times and are based on different impacts of certain market conditions. This can help minimize overall portfolio losses.
Companies with an inclusive culture who hire staff members with differing backgrounds see a significant increase in profit. Diverse businesses see 2.3 times higher profits per employee. While demographics may not seem to directly relate to revenue, here are 4 ways inclusion intersects with profitability.
With diverse and inclusive companies 35% more likely to financially surpass their competitors, diversity, equity, and inclusion (DE&I) ought to be a top priority for every HR team.
Doing DEI well correlates with better change power, which in turn is linked not only to company performance but also leadership and employee engagement. These are all characteristics every executive would like to improve.
DEI investing is high on investors' agendas
It also positions you to achieve long-term sustainable returns and help drive change that could ultimately benefit us all. Research shows that organizations exhibiting strong DEI credentials perform better.
When you diversify your investments, you reduce the amount of risk you're exposed to in order to maximize your returns. Although there are certain risks you can't avoid, such as systematic risks, you can hedge against unsystematic risks like business or financial risks.
Having a mixture of equities (stocks), fixed income investments (bonds), cash and cash equivalents, and real assets including property can help you maintain a well-balanced portfolio. Generally, it's wise to include at least two different asset classes if you want a diversified portfolio.
A diversified portfolio is a collection of different investments that combine to reduce an investor's overall risk profile. Diversification includes owning stocks from several different industries, countries, and risk profiles, as well as other investments such as bonds, commodities, and real estate.
How does diversity create value?
Increase productivity – Diversity brings together different talents and skills. Each employee can learn from each other's experiences and apply this to their work, enabling them to bring fresh ideas to projects, creating a more productive environment.
Companies can benefit from diversity if leaders create a psychologically safe workplace, combat systems of discrimination and subordination, embrace the styles of employees from different identity groups, and make cultural differences a resource for learning and improving organizational effectiveness.
Research has shown companies that are committed to diversity, equity, and inclusion achieve results. For instance, a market analysis from last year showed that diverse and inclusive companies earn 2.5 times more per employee and are 35% more productive.
Even using McKinsey's causality-flawed methodology, my own research with Jeremiah Green at Texas A&M fails to find any reliably nonzero correlation, positive or negative, between prior firm performance and present firm executive racial or ethnic diversity.
When organizations promote DEI, it creates an environment where employees are comfortable sharing their ideas and speaking up. The power of collaborative effort can increase creativity and innovation. DEI fosters respect for diverse perspectives, which is essential for motivation.
Diversity initiatives suffered a blow last year, and companies investing in DEI fell to 27% in 2023, down from 33% in 2022. That number could drop further to 20% in 2024, according to a report from research and advisory company Forrester. But that doesn't mean that HR leaders are happy about it.
Investors have a very important role in advancing DEI efforts for all groups in society, including indigenous communities, women, people of colour, religious minorities, and others. To act on DEI, investors need to seek to shape inclusive corporate cultures, business models and societies.
“Investors value gender diversity, that's for sure,” he says. “They value it very strongly.”
The Return on Investment (ROI) of Diversity, Equity, and Inclusion (DEI) efforts is measured by evaluating improvements in areas like employee engagement, innovation and market share. It also involves quantifying the cost savings from reduced turnover and better talent acquisition.
Diversification strategies
Provides a well-rounded and balanced portfolio that can help minimize risk while maximizing returns. May not provide the highest potential returns. Can help you capitalize on short-term market trends and outperform the market. May not provide long-term stability, and can be unpredictable.
Can an investor be too diversified?
Over-diversification can end up reducing a portfolio's returns without meaningfully reducing its risk.
Over diversification is possible as some mutual funds have to own so many stocks (due to the large amount of cash they have) that it's difficult to outperform their benchmarks or indexes. Owning more stocks than necessary can take away the impact of large stock gains and limit your upside.
Investment portfolios that obtain the highest returns for investors are not usually widely diversified. Those with investments concentrated in a few companies or industries are better at building vast wealth.
Cash. A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. It not only gives investors precise knowledge of the interest that they'll earn but also guarantees that they'll get their capital back.
This would be your interest-based return if you built a 100% bond portfolio overnight. In the long run, if you were to only invest in AAA corporate bonds over time, you can expect a modern yield between 4% and 5%. Historic rates have been higher, sometimes up to 15%, leading to a 30-year average of 6.1%.
