If all of your investments in the portfolio are performing at the same time, you are NOT diversified.
It is easy to misinterpret this, so here are some guidelines:
- Diversification is about using assets and investments which do not have performance correlation.
- With a diversified portfolio, you will see a few asset classes or investments delivering at one point, NOT all.
- In fact, some of your investments can go in the opposite direction.
- This performance diversion reduces overall volatility in your portfolio. It is also a good way to ensure that you don’t get slaughtered at any time because of a concentrated portfolio.
- Asset Allocation, Diversification and Rebalancing are drivers of your alpha and can give better investment results.