Chapter 13
Diversification
The proven way to reduce portfolio risk
‘The only investors who shouldn’t diversify are those who are right 100% of the time.’
John Templeton
We are back to, ‘Do not put all your eggs in one basket.’ It captures the essence of diversification. If you put all your eggs in one basket and drop it, they all break. You are left with nothing (or with a mess). Conversely, if you spread your eggs across different baskets, by dropping one you do not lose everything.
This is the same with investing. Since nobody knows for certain how different assets will perform in the future, spreading investments across various assets reduces risk. When one falls, others may rise.
Diversification works only if different assets behave differently. ...
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