What is Diversification?

Once, it happened, Ah Tan excitedly announced to his whatsapp group: “ I finally learned what diversification is! I’ve put my money across 10 over cryptocurrencies and only half of them defaulted, the others are safe! Luckily I diversified!”

Abu, not to be outdone, announced:” Guys, guys, my diversification works! I’ve put money into 10 over properties, only the UK and Australia overseas ones not making money!”

Muthu retorted: “ That’s nothinglar guys, for years I’ve been investing with this fund manager, best in Malaysia! Right now I’ve got 100 over funds with this manager! I win the diversification contest hands down!”

Moral of story is this: Diversification, despite being a best practice, cannot solve basic problems like:

1. The investment has no stability, too much unknowns and assumptions.

2. The investment cannot diversify effectively to other countries, when government policies and tax laws are clearly against it.

3. The investment, despite the numbers, still falls within the same asset class and risk. Having 100 times the same thing still amounts to owning only the one same thing.

Effective diversification can only be achieved by looking at the big picture, owning enough stable asset classes, use the most efficient instrument for each asset class, and diversify no further than is necessary.

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