Diversification Means Always Having To Say You’re Sorry

As much as any topic in finance, cargo ships of ink have been spilled on the topic of diversification. It is unquestionably the anchor to designing an effective portfolio of investments. Though first formally articulated in Harry Markowitz’s seminal 1952 paper on Modern Portfolio Theory (MPT), the idea is commonsense to all of us: Don’t put all of your eggs in one basket. Because we don’t know what’s going to outperform, we spread our bets across a variety of investments. The trick, if it is one, as shown mathematically in MPT, is that we need to consider how the price of each investment varies in relation to the others. Assuming they don’t move in lock step with each other, there is inheren

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