Diversification

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. When most of a portfolio sits in one stock, one industry or one asset class, the outcome depends on that one thing rather than on the market. Promi's Diversification Check measures the largest asset class, with a caution above 70% of the portfolio and a warning above 90%.

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