Diversification
Spreading holdings so that no single failure decides the outcome.
Diversification lowers risk without a matching reduction in expected return, which is unusual enough that Harry Markowitz's name for it, the only free lunch in finance, has stuck for seventy years. The mechanism is correlation: holdings that do not move together leave a combined portfolio less variable than its parts.
It applies at several levels at once, across asset classes, across geographies within equities, and across sectors. Each layer helps only to the extent the things inside it are genuinely driven by different forces, which is why adding five technology funds diversifies far less than the count suggests.
Concentration is the same property in reverse. A position above 90% in one stock or sector makes the portfolio a single bet, and the outcome depends on one company or one industry rather than on the market.
Worked through
A concentrated position
Held 95% of the portfolio in one sector, which then fell 35% over six months.
- Starting value
- $280k
- Sector move
- -35%
- Concentrated
- $182k
- Broad market
- $246k
The sector fell 35%, a broad portfolio holding the same sector at market weight fell nearer 12%. Same event, different exposure.
Where this lives in Promi
Investing page. Concentration across asset classes and sectors.
Related in Investments & Portfolio
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