Our diversification algorithm was developed through extensive research. While we understand that volatility is often associated with higher returns, our goal is to minimize unnecessary portfolio risk. We accomplish this by investing in higher-volatility stocks that are uncorrelated and spread across different sectors, helping create a more concentrated yet balanced portfolio.

The lower the Diversification Quotient (DQ), the more correlated the stocks in the portfolio are. The higher the DQ, the more diversified the portfolio is considered to be. For reference, the S&P 500 typically has a DQ of approximately 1.41.

We calculate the Diversification Quotient using the following formula:

DQ = Weighted Sum of Individual VQs ÷ Portfolio Volatility Quotient (PVQ)

General guidelines for interpreting the Diversification Quotient:

• 1.0 – 1.5 DQ: Weak diversification
• 1.5 – 2.0 DQ: Moderate diversification
• 2.0+ DQ: Strong diversification

The Diversification Quotient generally remains relatively stable over the course of a year. Below are examples of indexes and billionaire portfolios we track for comparison: