Diversification is sometimes referred to as the one free lunch in investing.
That’s really just common sense, but so many investors, including the professionals, fail to take advantage of it.
The most famous proponent of diversification is the Nobel Prize-winning economist Harry Markowitz.
He says it’s just as critical today as it was when he first started writing about it in the early 1950s.
Suppose there is only two asset classes in the world: stocks and bonds. And, bonds mean just savings accounts or whatever is convenient.
If you are a 21-year-old with a great deal of personal capital, you can go 100% into stocks. Then you switch to 50% and so on.
If you’re getting on in the years you should be maybe more in bonds. But, you’re not going to consume everything at age 65, you’re going to live beyond.
So, don’t go 100% in.
Professor Markowitz says the biggest mistake investors make is that they chase performance, and often buy at the top and sell at the bottom.
If gold is going up, people will be rushing in to buy gold. There are two kinds of people ill-advised and well advised.
So, how do the well-advised invest?
Professor Markowitz gives the example of a lady who works at his local deli in San Diego.
“She overhears me having a conversation like this and she said: “How should you invest?” I say, “Take half your money and put it in your savings account and take the other half and put it in a Vanguard, well-diversified equity portfolio and leave it””.
Global stocks have been on a long bull run.
Professor Markowitz says that will end at some point, though it’s almost impossible to say when.
He shares his advice in the meantime:
“Diversify and re balance. They never invite me onto television because my message is — don’t look at television, diversify and re balance”.
Remember diversify, and every now and again, re balance to restore your original asset allocation.
