Diversification: what it gives and what it does not
beginner
Automated material · TradeAlmanac editorial deskDraft prepared by a language model from our stored data; not reviewed by an editor.
Diversification rests on one assumption: assets do not fall together. Everything else about it follows.
Where it works
When correlation between assets is low, a weak result from one is offset by a strong result from another, and the spread of outcomes narrows. That is mathematics rather than opinion.
Where it stops working
First: within one market. Thirty Russian equities correlate with each other enough to move together in a crisis. A portfolio of them is not diversified — it is merely subdivided.
Second: in a crisis. Correlations converge on one exactly when diversification is needed most. That is its main and irremovable property.
The useful limit
Past a certain number of positions each additional one barely reduces the spread while it certainly reduces your attention to each. A portfolio of fifty securities is a portfolio you know nothing about.
What gives more
Different asset classes: equities, OFZ (Russian federal loan bonds), currency. They react to different things, and that is the source of genuine diversification.
Related instruments
Draft prepared by a language model from our stored data; not reviewed by an editor.
Model: claude-opus-5
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