Investment value
since beginning

Durians and diversification

November 17, 2018
What diversification is not

There are some things we can all agree on. Books are more enjoyable to read in paper form. Durian should be a superfood. Also, that diversification is a good thing. It’s an investment principle that we all know we should be following. Who doesn’t want to take less risk and enhance their portfolio returns at the same time? (a.k.a a free lunch?)

But we also need to understand what diversification is not:

1) You can’t diversify your way out of a financial storm
Having a diversified portfolio will not protect you from market volatility in the short-term - you will still have big down days or even consecutive months of losses. It will not prevent bear markets and it cannot protect you against market reactions to Trump’s latest Tweet. Diversification may or may not help in the short-term, but it’s really a strategy for the long-term investor that will help you smoothen out returns over market cycles.

2) More is not always better
Having a portfolio with more components does not mean that it’s more diversified. This might be true if all the asset returns are uncorrelated (i.e. the prices do not rise and fall together), but this is unlikely to hold true.  Also correlations are constantly changing, even assets that were uncorrelated in the past may be in the future.

Each asset you hold is less important than how they interact together (known as covariance) to reduce your portfolio’s overall risk. The marginal benefit of adding another investment decreases past a certain point . This means adding a 20th fund to your portfolio will probably not meaningfully improve risk-adjusted returns, and your advisor might just be building you a very complex portfolio to justify their own existence and high fees.  

3) Diversification is not exciting
In fact, it’s pretty dull to talk about a portfolio that gives you globally diversified exposure to the world. You’re not going to hit any home runs like Amazon, but you’re also less likely to strike out with all your life savings in Lehman Brothers. You can leave the excitement to other parts of your life - being able to live the life you want after retirement is exciting, but the path to growing your retirement nest egg to get there doesn’t need to be.  

Diversification is a strategy that plays out over a long period of time, and give you a greater chance of achieving your goals without having to predict how the future will turn out.  As Howard Marks said:

“You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.”

If you enjoyed reading this article from The Know, you can subscribe to our weekly newsletterFollow us on LinkedIn or connect with us on Facebook as we bring you financial insights from endowus.
View on


Morgan Stanley's mutual funds, investment bank and Palantir dispute over Palantir's valuation (Bloomberg)

The inside tale of how Nokia lost a market it dominated (The Economist)

Desperate Chinese middle class take big risks to move money, and themselves, overseas (SCMP)


Cheap is great, but free will cost you (Bloomberg)

Causeway Bay’s Russell Street trumps 5th Avenue in New York as the world’s most expensive retail rental market (SCMP)

The market’s been falling. I’m putting my money in stocks anyway. (NY Times)


Ho Kwon Ping: How Singapore can play a crucial role in the emerging Pax Sinica by bridging East and West (SCMP)

Facebook stands ground after Singapore criticism over 1MDB post (Bloomberg)

Go-Jek partners DBS to offer regional payments services (Straits Times)


Into the Brexit endgame (The Economist)


TED Radio Hour: Why do we undervalue introverts? (NPR // 18 mins)

Good to Know

Dizzying heights: Vertical tourism in China (The Atlantic)

These guys deal with cannabis in Singapore - and don't feel paranoid (SCMP)

Louis Armstrong’s life in letters, music and art (NY Times)

16 popular psychology myths you probably still believe (Nat Eliason)

Stan Lee, the progressive genius: A tribute to Marvel's mythmaker (The Guardian)

Low carb diets are still a metabolic mystery (Popular Science)

UK still top of the class for rich Asians (SCMP)