A Portfolio Diversification Argument for Social Inclusion

By Dr. Vange Hochheimer, Associate Professor of Economics, Whitworth University, President & CEO, Grand Fir Analytics, LLC

As a financial economist, I teach my students about the
business case for closing the education opportunity gap and striving for a diverse
labor force. In a nutshell, given a globalized world, comprised of a melting
pot of ethnicities with different tastes and preferences, it would be risky to create
and invest in products designed for a homogeneous population.

Investment portfolio theory teaches us that if you spread
your investments across different asset classes, your risk exposure will be minimized.
Investing in a diverse pool of assets that include domestic stocks, bonds,
short-term investments, international stocks, and a variety of funds, helps
mitigate the downside of the market. The benefits of a diversified investment
portfolio come from the fact that not all assets in the portfolio will be
correlated to the overall economy in the same way. When some asset values go
down and others go up in the portfolio, the net negative impact can be
completely or partially offset. This set of inverse correlations in your
portfolio, contribute to a stable and profitable investment portfolio.

The argument in favor of portfolio diversification has
significant relevance to the benefits that can accrue from having a diverse
market and workforce. For instance, research suggests that there is a positive
correlation between high-skilled immigration, innovation, and economic growth.
Singapore is a great example of a country that has benefited from being a
multicultural nation with ethnic and religious diversity. Today, Singapore is a
significant global financial center and is internationally recognized as a most
technology-ready nation. Singapore’s diverse market and workforce has led to
“creative destruction” or innovation that has resulted in increased
“Schumpeterian profit”. Schumpeterian profit occurs when firms can capitalize
on the returns from creative innovation.

Innovation resulting from diverse ideas in the workplace
has the added benefit of expanding market share. The expansion of market share
will in turn increase the financial resiliency and profitability of the firm, similar
to the case of a well-diversified investment portfolio. Diversity in people and
in production allows businesses to hedge against market volatility.

In terms of the portfolio diversification argument for
social inclusion, expanding education opportunities to a diverse population
will result in a skilled labor force that is productive and innovative. A
skilled and diverse workforce will lead to increased profitability for the
firm. There is compelling research that suggests that a skilled and diverse
workforce leads to benefits that go beyond profitability. Studies show that
diversity in the workforce leads to stronger governance and better
problem-solving abilities. For instance, a survey conducted by the Pew Research
Centre suggests that more women in the workplace leads to better
problem-solving, ethical behavior and mentoring.

In conclusion, think about this question: Imagine if our investment portfolios were comprised of just one stock?

View this article and more in the 2021 Annual GSI Connect Magazine, in partnership with the Spokane Journal of Business.

Article Source: Greater Spokane