Why diversify when xxxx is returning x%?

One question I get asked a lot is why I recommend a diversified investment when I know that xxxx is doing so well at the moment.

There are many double digit and sometimes triple digit returns, e.g. China stocks, tech stocks, etc. why are we spreading our eggs into many baskets? Sometimes even Warren Buffet gets dragged into the conversation, apparently he advocates at one point to have strong conviction in one’s choice of asset and bet the whole house on it.

I’m not sure how that sentiment came about because one of his more well known observation is that most people should just invest in a passive index fund because they have neither the discipline nor emotional fortitude to invest successfully.

Perhaps a close description of what we are trying to do is to create an anti-fragile investment. Too often countless careless investors have lost their fortune by concentrating their assets into few investments over too few asset classes. There is an in-born fragility in how a single individual can manage their investments necessarily because of limited time, limited experience and limited effort.

And it is not a question of intellect either as even a Noble prize creator of the Options formula fell prey to the vagaries of the market. As the saying goes, the market can remain irrational longer than you can remain solvent.

A client once remarked to me, the longer one invests, the more complex investing seems to be. It is only the beginners that always thinks investing is easy and have wild expectations of how much returns an investment can make.

First, never lose money. Then strive to make your investment as anti-fragile as possible. Yes, this means diversification. One who think he has the market figured out, will one day have his ass handed to him. Those who have healthy respect and always on their toes, will survive.

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