Investors and their advisors talk at liberty about diversification, that when pushed, it becomes very obvious that people are confused about the concept of diversification and yet it is of primary importance because it is diversification which lowers the chances of permanent loss.
The portfolios that I manage have exposure to 11,500 different listed shares in fixed interest investments all around the world. If you own 10 cows, then half of each cow is very important to you because 10% of your production is tied up in each animal. If however you own 11,500 cows, then animal is no less important as the milking characteristics of the herd. This is the same with investment. Owning 11,500 different investments reduces your chances of suffering permanent loss to effectively zero.
The focus of advice then shifts to asset allocation which defines the ‘uppy-down-iness’ of the portfolio or volatility as it is technically called. This is a subject of another article at another time.
Often investors imagine that they can achieve greater diversification by employing a range of different entities to manage their monies, be it at different banks, fund managers or advisers. The general idea behind this being “Well, Fiona might be right about structured asset funds but just in case she isn’t, we’ll have some money somewhere else”.
It’s important however to drill down to the actual number of different investments that you own because it very quickly becomes evident that such a strategy is going to be wasted effort because ultimately you are going to be concentrating your assets. Diversification is not relying on several different brands and believing that corporate uniform is a symbol of spreading your risk, you have to drill right down into your actual investments.
Let’s imagine you have one of our portfolios with such a wide range of different investments.