The Frustration of Diversification

The website Visual Capitalist recently published an article showing the best-performing asset class for each decade since 1950.


Even with hindsight of news and current affairs it would have been impossible  to guess these outcomes in advance. Look no further than the 2010s . As the smoke was clearing from the Great Financial Crisis, which was undoubtedly a US led crisis, who would have picked American “Mega Caps” as the star performer.


What about this decade?  What’s the obvious top performer likely to be. It’s impossible to predict. But most investors would like to participate in the upswings that these trends represent while minimizing the potential damage when things inevitably go sideways.


The only strategy available to investors to accomplish both is to own a diversified portfolio in perpetuity.


As the legendary bond investor Howard Marks wrote in a 2006 memo called Risk, diversification comes with a cost.


“Diversification by definition implies a willingness to trade of return for safety, motivated by acceptance of the fact that knowledge of the future is imperfect.


Or in other words, diversification means always having to say you’re sorry,


There are times that diversification might cause higher than normal levels of frustration. We could have all just bought and held the Nasdaq from 2010. But could we have foreseen these stellar returns, and more importantly would we have held our nerve through all the 30-50 percent plus drawdowns along the way? Probably not.


Diversification is prudence and prudence sometimes causes frustration. Investment success however is all about staying the course and there is no better way to achieve this than diversifying.


  • The value of investments may go down as well as up and you may get back less than you invest.

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