The stock market soared during the coronavirus pandemic, growing the wealth of a group of mostly white and privileged shareholders but leaving many women, people of color, and low-wage workers to suffer through unemployment, food scarcity, and personal loss.
Percentage of corporate board members of Fortune companies who were women of color in Percentage of corporate board members of Russell companies who were women in Percentage of corporate board members of Russell companies who belonged to an ethnic minority in According to the U.
Census data show that Much work remains to achieve racial and gender equity on boards of directors across corporate America, from Fortune companies to small-cap growth companies. At the same time, investor demand for more racial, ethnic, and gender diversity on corporate boards is growing dramatically, and academic research is increasingly illustrating the value of diversity to corporate performance.
Some in the business world are taking laudable steps, and their efforts provide useful lessons for improving diversity. However, despite a large swath of corporations expressing that they intend to diversify their boards, progress has been limited. Corporate America faces many challenges in building more diversity, equity and inclusion at the top. Significant progress will require both private sector initiatives and the unique tools available to federal regulators.
Companies should focus on building a diverse pool from which to draw candidates; to do so, they need to reach out to new organizations that can help find suitable candidates through new pipelines. Companies should also eliminate selection criteria and processes that have blocked board diversification in the past, identify new approaches, standardize new best practices, and regularly assess the effectiveness of those practices going forward. Finally, the U. Securities and Exchange Commission SEC must recognize that the current principles-based approach to board diversity disclosure does not meet the demands of the marketplace.
Investors, other market participants, and the public have made it clear that progress on diversity is at least as important at the board level as it is across the rest of the workforce. This report considers the current state of corporate board diversity and provides recommendations to accelerate progress.
Beyond qualities that determine good executives, gender-diverse boards may help provide strong financial performance for their respective firms. In her speech, Stein cited Dr. Strine, Jr. Brummer and Strine specifically mention a study by The Carlyle Group, which observed that portfolio companies with two or more directors who identified as Black, Hispanic, Asian, or women experienced average earnings growth of These benefits stem from the diverse lived experiences that women and people of color, in particular, bring to the table.
Ultimately, other disadvantaged groups, such as people with disabilities and veterans, should be included in board diversity-building efforts. For example, a recent Morningstar analysis of mid- and large-cap companies in the United States and Canada found that of the 65 companies that disclosed racial and ethnicity data for their upper management, those with above the median level of diversity in their upper management ranks had higher one-to-five-year returns, compared with less diverse firms, in 84 percent of cases.
And more diverse boards in turn would open up opportunities for advancement for many who have not previously been able to access those positions.
Pressure on companies has grown from within and without to step up board diversity efforts. In December , the Nasdaq—one of the two major stock exchanges in the United States—filed a proposal with the SEC, which is charged with overseeing the stock exchanges, seeking to establish new rules for companies that want to list their stock on the Nasdaq.
This exception weakens the proposal and runs contrary to its stated aim. Crenshaw stated, the proposal is a step in the right direction, 24 and on August 6, , the SEC approved the Nasdaq proposal. The proposal will be implemented in stages, with deadlines for companies to meet the requirements at each stage. Share prices will drop following any bad news, such as an indefinite pilot strike that will ultimately cancel flights.
This means your portfolio will experience a noticeable drop in value. You can counterbalance these stocks with a few railway stocks, so only part of your portfolio will be affected. In fact, there is a very good chance that these stock prices will rise, as passengers look for alternative modes of transportation. You could diversify even further because of the risks associated with these companies. That's because anything that affects travel will hurt both industries. Statisticians may say that rail and air stocks have a strong correlation.
This means you should diversify across the board—different industries as well as different types of companies. The more uncorrelated your stocks are, the better. Be sure to diversify among different asset classes, too. Different assets such as bonds and stocks don't react the same way to adverse events.
A combination of asset classes like stocks and bonds will reduce your portfolio's sensitivity to market swings because they move in opposite directions. So if you diversify, unpleasant movements in one will be offset by positive results in another. And don't forget location, location, location.
Look for opportunities beyond your own geographical borders. After all, volatility in the United States may not affect stocks and bonds in Europe, so investing in that part of the world may minimize and offset the risks of investing at home.
Obviously, owning five stocks is better than owning one, but there comes a point when adding more stocks to your portfolio ceases to make a difference. There is a debate over how many stocks are needed to reduce risk while maintaining a high return. The most conventional view argues that an investor can achieve optimal diversification with only 15 to 20 stocks spread across various industries.
Investors confront two main types of risk when they invest. The first is known as systematic or market risk. This type of risk is associated with every company. Common causes include inflation rates, exchange rates , political instability, war, and interest rates. This category of risk is not specific to any company or industry, and it cannot be eliminated or reduced through diversification.
It is a form of risk that all investors must accept. Systematic risk affects the market in its entirety, not just one particular investment vehicle or industry. The second type of risk is diversifiable or unsystematic. This risk is specific to a company, industry, market, economy , or country. The most common sources of unsystematic risk are business risk and financial risk.
Because it is diversifiable, investors can reduce their exposure through diversification. Newer, fast growing companies have different risk and return characteristics than older, more established firms.
Companies that are rapidly growing their revenue, profits and cash flow are called growth companies. These companies tend to have higher valuations relative to reported earnings or book value than the overall market. Their rapid growth is used to justify the lofty valuations. Value companies are those that are growing more slowly. They tend to be more established firms or companies in certain industries, such as utilities or financials.
While their growth is slower, their valuations are also lower as compared to the overall market. Some believe that value companies outperform growth companies over the long run. At the same time, growth companies can outperform over long periods of time, as is the case in the current market.
There are a number of different bond asset classes , although they generally fit into two classifications. First, they are classified by credit risk—that is, the risk that the borrower will default. Treasury bonds are considered to have the least risk of default, while bonds issued by emerging market governments or companies with below investment grade credit have a much higher risk of default.
Second, bonds are classified by interest rate risk, that is, the length of time until the bond matures. Bonds with longer maturities, such as year bonds, are considered to have the highest interest rate risk.
In contrast, short-term bonds with maturities of a few years or less are considered to have the least amount of interest rate risk. There are a number of asset classes that do not fit neatly into the stock or bond categories. These include real estate, commodities and cryptocurrencies.
Creating a diversified portfolio with mutual funds is a simple process. Indeed, an investor can create a well diversified portfolio with a single target date retirement fund. One can also create remarkable diversity with just three index funds in what is known as the 3-fund portfolio.
However one goes about diversifying a portfolio, it is an important risk management strategy. By not putting all of your eggs in one basket, you reduce the volatility of the portfolio while not sacrificing significant market returns. He graduated from law school in and has written about personal finance and investing since With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree.
Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Updated: Sep 9, at PM. Portfolio Size Advantages Disadvantages Large -- many stocks in portfolio High diversification reduces risks, including company-specific and sector risks Relatively protected against large losses Potential opportunities for tax-loss harvesting Can be cumbersome to manage Making many stock purchases can be costly, depending on your broker Requires more time and energy to maintain Small -- few stocks in portfolio Outperforming stocks can have a greater impact on your portfolio's value Your best ideas are more likely to be prominently featured Administratively easy to manage Lack of diversification creates potential for severe losses in your portfolio's value Increased company-specific, sector, and geographic risk Fewer opportunities to capture stock appreciation upside.
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