The concept of diversification is so taken for granted on Wall Street that it is commonly overlooked. This may be due, in part, to the fact that the idea of diversification has been around, if not forever, at least codified in the Bible and later on by William Shakespeare himself. From Harry Markowitz who was recently interviewed by Robin Powell:
“Well, the Bible knew about (diversification)! Shakespeare knew about it too. In The Merchant of Venice, Antonio is asked, why are you so glum? Is your business going badly? And he replies, “Believe me, no. I thank my fortune for it — My ventures are not in one bottom trusted, Nor to one place, nor is my whole estate, Upon the fortune of this present year.’”
In the new (fascinating) book, Grant, Ron Chernow chronicles the financial challenges former President Grant faced after his disastrous investment in a brokerage firm, Grant & Ward. From Michael Batnick’s notes on the book at the Irrelevant Investor:
Diversify. Not only did he [Grant] do no due diligence, but he put everything he had into the operation. Don’t put all your eggs in one basket is hardly a novel concept. He should have known better.
I have written, at great length, about the benefits of diversification. Even still, investors are easily investors are swayed from their positions by the hot new thing. Robin Powell writes:
I’m constantly surprised at the ambivalence of so many investors are towards diversification. Even if we know, deep down, that it’s by far the most logical route, we just can’t help ourselves in having a flutter. We’re easily swayed by narratives and opinions into betting on a particular region, sector or asset class. Bitcoin?* Go on, we’ll have a bit of that as well.
The fact of the matter is that diversification, or lack thereof, plays a big role in how our portfolios perform. While the ETF (and index fund) revolution has put the emphasis on costs, i.e. the cost matters consensus. Asset allocation still matters. As Rusty Guinn at Epsilon Theory writes:
By and large, the decisions you make about risk, diversification and behavior are all going to impact your portfolio more than the expenses you are paying on funds or to your financial advisor.
It’s easy to get swept up in the latest goings on Wall Street, but the simple fact is that there’s really not all that much new in the world. Ten years after the global financial crisis it is easy to forget about diversification but it will matter soon enough.
*Hint, diversifying across various cryptocurrencies is not diversification, per se.