The classics are often filled with sound advice for investors. And no wonder. Good investment guidelines are usually common sense tripped out in financial language. But since the best of the classics address timeless truths of human nature, it’s no surprise that they contain sage exhortations that have stood the test of time.
As an example, the biblical book of Ecclesiastes says: “Give portions to seven, yes to eight, for you do not know what disaster may come upon the land.” Here is a truth that Harry Markowitz restated in the ’50s to win the Nobel Prize: diversification reduces risk. Of course, he quantified the degree of risk reduction and identified the optimal level of diversification. But the basic principle is still the same.
Over the years, some have held out diversification as a way to enhance returns. After all, you don’t know what latent good news is out there, either. And in good times this seems to work. But often the way to win is not to lose. And the best way not to lose, is to diversify your investments: assets, sectors, and holdings.
Douglas R. Tengdin, CFA
Chief Investment Officer
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