We’ve written ad nauseum about diversification in this blog. We’ve done so because it is a proven principle to successful investing. Furthermore, so many individual investors are not properly diversified based on their specific life situation and goals. Most aren’t properly educated but some actually think they can do better. While there are certainly select individuals that can do better, most of us aren’t going to outsmart or outperform proven investment practices and principles.
I wanted to share a LinkedIn post from Ray Dalio, the founder of Bridgewater Associates, a highly successful investment fund. Mr. Dalio’s piece is easy to read, informative and his argument is supported with actual data. You can access the post here
Remember, the idea with investing is to get the odds in your favor. Diversification is one of the proven principles over time that significantly contributes to investor success.
To conclude, I’d like to share an analogy. Most of us like chocolate chip cookies. There are several ingredients that go into making a good chocolate chip cookie. If one of those ingredients is excluded or mis-proportioned per the recipe, the cookies don’t end up tasting as good. When you think of the ingredients for a cookie recipe in isolation, clearly the sugar and chocolate chips are appealing while the vanilla, the flour and baking soda are not. However, without all of the ingredients you don’t get the desired end result, a warm and tasty chocolate chip cookie.
Diversifying is very similar to a cookie recipe. You need all the ingredients (asset classes) to attain the best end result. You can exclude some of the necessary asset classes from a portfolio allocation but you may very well end up with a less than desirable end result.