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An investment in the stock market should be made with an understanding of the risks associated with common stocks including market fluctuations. Investments in fixed-income securities are subject to market, interest rate, credit, and other risks. Bond prices fluctuate inversely to changes in interest rates. This risk is heightened in lower-rated bonds.
If sold prior to maturity, fixed-income securities are subject to market risk. All fixed-income investments may be worth less than their original cost upon redemption or maturity. Cash alternatives may be sensitive to interest-rate movements, and a rise in interest rates could result in a decline in the value of the investments.
Different funds will have varying degrees of exposure to equities as they approach and pass the target date. The target date is the approximate date when investors plan to start withdrawing their money, such as retirement.
The principal value of the funds is not guaranteed at any time, including at the target date. More complete information can be found in the prospectus for the fund. In limited circumstances, tax advice may be provided by Wells Fargo Bank, N. Asset allocation and diversification are investment methods used to help manage risk.
Once a company has identified its strategic assets, it can consider this second question. Although the question seems straightforward enough, my research suggests that many companies make a fatal error. They assume that having some of the necessary strategic assets is sufficient to move forward with diversification. In reality, a company usually must have all of them. The diversification misadventures of a number of oil companies in the late s highlight how dangerous it is to go up against a royal flush when all you have is a pair of jacks.
Companies such as British Petroleum and Exxon broke into the mineral business they could exploit their competencies in exploration, extraction, and management of large-scale projects. Ten years later, the companies had dropped out of the game.
Consider as well the experience of the Coca-Cola Company, long heralded for its intimate knowledge of consumers, its marketing and branding expertise, and its superior distribution capabilities. Based on those strategic assets, Coca-Cola decided in the early s to acquire its way into the wine business, in which such strengths were imperative. The company quickly learned, however, that it lacked a critical competence: knowledge of the wine business. As in poker, the lesson for companies considering diversification is the same: you have to know when to hold them and when to fold them.
What if Coke had known in advance that it lacked an important strategic asset in the wine-making business? Should it have summarily abandoned its diversification plans? Not necessarily. Companies considering diversification need to answer another pair of questions: If we are missing one or more critical factors for success in the new market, can we purchase them, develop them, or make them unnecessary by changing the competitive rules of the industry?
Can we do that at a reasonable cost? Consider the diversification history of Sharp Corporation. In the early s, the company decided to leverage its existing strengths in the manufacturing and retailing of radios by moving first into televisions and then into microwave ovens.
Sharp licensed the television technology from RCA and acquired the microwave oven technology by working with Litton, the U. Similarly, Sharp diversified into the electronic calculator business in the s by buying the necessary technology from Rockwell.
The Walt Disney Company has diversified following a similar strategy, expanding from its core animation business into theme parks, live entertainment, cruise lines, resorts, planned residential communities, TV broadcasting, and retailing by buying or developing the strategic assets it needed along the way.
We can return to Sharp to illustrate how companies lacking crucial strategic assets can build them in-house. In the s, it has made even bigger investments in order to bring the company up to speed in the liquid-crystal-display industry. One case in point is Canon, which wanted to diversify from its core business of cameras into photocopiers in the early s.
Canon boasted strong competencies in photographic technology and dealer management. But it faced formidable competition from Xerox, which dominated the high-speed-copier market, targeting large businesses through its well-connected direct sales force. In addition, Xerox leased rather than sold its machines—a strategic choice that had worked well for the company in its earlier battles with IBM, Kodak, and 3M. After studying the industry, Canon decided to play the game differently: The company targeted small and midsize businesses, as well as the consumer market.
Then it sold its machines outright through a network of dealers rather than through a direct sales force, and it further differentiated its products from those of Xerox by focusing on quality and price rather than speed. As a result, whereas IBM and Kodak failed to make any significant inroads into photocopiers, Canon emerged as the market leader in unit sales within 20 years of entering the business. It was, however, a radically different business because of the way Canon had transformed it.
Not all companies have the skill, financial strength, and managerial foresight to pull off what Canon did. But, together with Sharp and Disney, Canon provides an excellent example for companies considering diversification without all the required strategic assets in hand.
Those assets must be obtained one way or another; otherwise, moving forward into new markets is likely to backfire. If managers have cleared the hurdles that the preceding questions raise, they then need to ask whether the strategic assets they intend to export are indeed transportable to the new industry.
Too many companies mistakenly assume that they can break up clusters of competencies or skills that, in fact, work only because they are together, reinforcing one another in a particular competitive context. Such a misjudgment can doom a diversification move. The firm strives to achieve solid risk-adjusted returns over time. Explore client engagement resources, advisor focused insights and expert views from our affiliates. Access your AMG Funds account. View your account balance and transaction history.
Purchase or redeem shares. As the exclusive distribution arm of AMG, we are your single point of access for mutual funds and separately managed accounts from our independent investment managers. Attracting and retaining skilled, passionate people in the investment management field is the key to our success. Find out more below. Diversification is 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 should each react differently to changes in market conditions. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Here, we look at why this is true and how to accomplish diversification in your portfolio.
Also known as "systematic" or "market risk," undiversifiable risk is associated with every company. Causes are things like inflation rates, exchange rates, exchange rates, interest rates, political instability and war. This type of risk is not specific to a particular company or industry, and it cannot be eliminated or reduced through diversification; it is just a risk that investors must accept. This risk is also known as "unsystematic risk," and it is specific to a company, industry, market, economy or country; it can be reduced through diversification.
The most common sources of unsystematic risk are business risk and financial risk. Thus, the aim is to invest in various assets so that they will not all be affected the same way by market events. Diversification does not guarantee a profit or protect against a loss in declining markets. Say you have a portfolio of only airline stocks. If it is publicly announced that airline pilots are going on an indefinite strike, and that all flights are cancelled, share prices of airline stocks will drop.
Your portfolio will experience a noticeable drop in value. If, however, you counterbalanced the airline industry stocks with a couple of railway stocks, only part of your portfolio would be affected.
In fact, there is a good chance that the railway stock prices would climb, as passengers turn to trains as an alternative form of transportation. But you could diversify even further, as there are many risks that affect both rail and air, because each is involved in transportation.
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