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.