COTW: Diversification vs. the Most Loved & Hated

COTW: Diversification vs. the Most Loved & Hated

The chart below can be downloaded here.


This week’s “chart” takes a fresh look at the asset class return quilts or periodical tables often used by advisors to demonstrate the benefit and consistency of diversified portfolios relative to big bets on single sectors or asset classes.  In the quilt below, we have replaced broad asset classes with some of the most polarizing assets—from commodities to short volatility and bitcoin.  To be clear, we are not suggesting investors should abandon diversification. The list of assets below was chosen with the benefit of hindsight and would have been impossible to compile 5 or 10 years ago. Making assumptions based on the performance of these single assets is not practical.  What we are suggesting is that hard and fast rules don’t always work and that investing is extremely challenging… and humbling.


Consider the following:

  • After experiencing an almost 90% drawdown for the year-to-date through May, the short volatility fund shown has still compounded at over 15% for almost 7 years (since inception).

  • Amazon lost nearly half its value in 2008 and still went on to grow by 35% per year in the decade through May 2018.

  • Cash returns have been punitively low for the last 10 years. How might that have impacted the demand and resulting return of other competing asset classes?

  • Gold has outperformed core bonds for the last decade. Core bonds are part of the strategic/policy allocation for almost every individual and institutional investor in the world, while gold is often shunned (or sometimes worshipped).

  • Swinging for the fence with concentrated bets on single names may be more exciting (and potentially rewarding) but be prepared for a bumpy ride.



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