It may seem obvious, but the old adage ‘Don't put all your eggs in one basket,' remains true of modern portfolio theory.
Through holding a varied mix of assets an investor will, in theory, always have exposure to some winners, thereby diversifying overall risk. However, simply holding a range of assets does not make for a diversified portfolio. True diversification means understanding that asset classes react differently to various market conditions and perform with varying levels of correlation. Efficient multi-asset investing emphasises low performance correlation between assets, aiming to optimise the balance between performance and risk (see box below). Diversity does not always equal diversificatio...
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