Everyone knows. You should not put all your eggs in one basket. You should diversify so that your wealth is protected against the unforeseen.
What does this mean?
It means that the prospects of your investments should be linked to different factors.
If all your investments do well at the same time, then it probably means that your portfolio depends on the same factor(s) and that the portfolio is not diversified enough. You should, in fact, expect some elements to perform poorly at times.
If you’re trying to eliminate the underperforming parts of your portfolio, you are probably eliminating the parts that will do well in the future, when the current star performers take a back seat.
It is how it works. This year’s winners are likely to become next year’s losers.
Of course, you don’t want to bet on bad investments. No one wants that. However, there is a difference between a bad investment and one which is currently not shining. We don’t know exactly which parts will perform when – no one has that ability or foresight. But a good portfolio will always, knowingly, keep some losers. It’s uncomfortable but it is the mathematical truth of diversification.
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//31 July 2020