Diversification
Spread money across many asset classes, regions and strategies so that no single loss dominates.
- When does it start protecting?
- All the time, by reducing reliance on any one market.
- Where does it stop?
- In broad crises many assets fall together. An equal-weight mix of global stock markets still fell 66% from 1929 to 1932.
- Is upside limited?
- No cap, but returns are an average of the parts.
- Is the cost known or unknown?
- Unknown: the return given up versus the best-performing asset, plus added complexity.
- Fits best when
- Always, as a foundation. It is not a reliable hedge against a broad market decline.
- Watch for
- Assets that look unrelated in calm markets can move together in a panic.
Drawdown figure: Bridgewater Associates, 2019.