Rethinking Diversification by Dirk Vandycke
It’s All About Manipulation
Although diversification is a popular method of managing risk when it comes to financial investments, it is often undifferentiated. Here in this first part of a two-part series, we’ll take an in-depth look at the concept and determine if it is indeed a good way to manage risk.
When you go back in history, you’ll find that human beings have been groomed not to take chances in physically hostile environments. We are genetically tuned to fear risk. Uncertainty means risk and implies lack of control, and it is this lack of control that makes it difficult to trade the markets. But there’s no reason to fear risk in the markets — well, perhaps there is but it’s far less than we subconsciously believe. Without uncertainty, the financial markets wouldn’t exist and the positive aspect to risk is that it equals opportunity. Instead of fearing risk, perhaps we should try to respect it, get to know it, and try to contain it.
We all know that we shouldn’t put all our eggs in one basket. In order to reduce our risk, we should diversify our assets. But does that really work? Let’s find out.