The investors’ mantra has always been, “Diversification, diversification, diversification,” similar to the real estate mantra, “Location, location, location.”

But when hearing the term “diversification,” investors often think stocks versus bonds. It is widely understood that diversifying an investment portfolio is designed to provide less risk than what would be experienced when holding a single asset.

It is often overlooked, however, that diversification can exist within each type of investment.

For example, you can potentially reduce risk by spreading your investments across different sized companies (called “market capitalization,” such as small, medium or large companies) or across different industries (called “sectors,” such as financials, health care, information technology, etc.).

Studies show that a portfolio allocated across a variety of sectors experiences nearly four times the diversification benefit than that of a portfolio allocated across market capitalizations.

In the investing world, the statistical measure of “correlation” describes how two things move in relation to one another.

Historically speaking, the correlation between stocks and bonds has been negative, meaning they move opposite each other. When stocks go up, bonds go down and vice versa.

If there is low correlation between two assets, then when one asset declines or gains in value, the other declines or gains, but to a lesser extent. In contrast, if there is high correlation between two assets, they tend to move more closely in tandem with each other.

Recognizing and controlling this relationship in a portfolio is what reduces overall risk.

All else equal, the correlation between sectors is much lower on average than the correlation between market capitalization. Having perspective on correlations within a portfolio will help make sense of the overall amount of risk the investor ultimately takes.

Keep in mind that investing is not limited to choosing between sector allocation or company sizes, but rather combining different sectors and company sizes together will ultimately lower portfolio risk even further.

In 1960, during a speech given while serving as senator before becoming president of the United States, John F. Kennedy stated, “Effort and courage are not enough without purpose and direction.”

This concept applies not only to setting the direction for the advancement of our nation, but also holds true in the world of investing.

Wendy Bennett is a senior financial adviser in Butler.