Quote for the Week
The popular view of diversification is not putting all your eggs in one basket. If you place all your bets on one holding, you can win big or lose big, but the possible range of outcomes is wide. If you spread your bets across a number of holdings, the odds are that you will not be wrong on all of them or right on all of them. Then the range of outcomes will be narrower.
Or will it? Suppose all those holdings you bet on move in sympathy with one another. If you had held all 50 of the “favorite fifty” in the early 1970s, your portfolio would not have been diversified at all: Those 50 stocks went merrily up together and horrifyingly down together. The 50 holdings acted like one holding.
The first lesson of Modern Portfolio Theory is that diversification has more to do with seeking assets whose prices move in different kinds of rhythms than it has to do with proliferating the number of baskets in which you carry your eggs. A few holdings with radically different types of market behavior will do more to smooth out the pattern of portfolio returns than 50 or 100 holdings that move up and down together. — Peter Bernstein (source)
From the Archives
Last Call
- Do It Your Way – M. Housel
- When a Crystal Ball Isn’t Enough to Make You Rich – Elm
- How I Learned To Stop Worrying & Love Market Fluctuations – Kingswell
- A Dozen Things I’ve Learned from Jenny Lee about Investing and Business – 25iq
- The Impact of Fed Policy Changes on Stock-Bond Correlation – Verdad
- Just do it! Brand Name Lessons from Nike’s Troubles – Musings on Markets
- Blueberry Billionaire: 56 Years of Business Knowledge (video) – The Knowledge Project
- The More This Rolex Costs, the More You Want It. Here’s Why – Wired
- Hummingbirds thrive on an extreme lifestyle. Here’s how. – Knowable