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ETF Specialist

A Market Lacking Diversification

Correlations have increased across the market, but a few bastions of diversification remain.

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We've all heard the saying, "Don't put all of your eggs in one basket." The idiom doesn’t raise any eyebrows; it's intuitive. If you drop the basket, you break all of your eggs. If, on the other hand, you place half of your eggs in a second basket, dropping one basket renders only half as much culinary carnage. If only in a very simple and cutesy manner, the phrase speaks to a profound investment doctrine: diversification.

With regard to the egg idiom, the driving intuition is downside protection. Diversification allows one to significantly limit the potential for catastrophic loss. With regard to financial assets, however, short-term losses are generally not catastrophic. The interesting point is that there are benefits to diversification, even in the case that assets increase in value over time.

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Abraham S.H. Bailin does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.