Hello and thank you for being here. In this section of episodes, we’re focusing on the principles of a well-constructed portfolio. But first, let’s settle our shoulders and take one deep breath.
I want you to imagine that you have been tasked with planting a thousand seedlings, and you want each of them to grow into an enormous oak. Would you search for one perfect spot and plant them all next to each other? Or would you search for one thousand goods spots and plant them individually? This is the wisdom of diversification. We cannot know what the future holds so we resist the urge to concentrate our investments in one location. Instead of trying to make good decisions, we simply try to avoid bad ones. We cannot know the future, so we make an unknowable future part of the plan. Let’s take a moment to reflect on just how random and unpredictable the world is. Think of all the things that have happened that nobody was able to predict. Just take a moment to consider.
A simple way to relax about money is to accept that nobody has a crystal ball. In the words of celebrity investor Josh Brown “We’re all just guessing, but some of us have fancier math”. It’s calming to know you don’t have to search for what the future will hold.
Josh’s comment build on something that was said much earlier by Socrates. “To know, is to know that you know nothing. That is the meaning of true knowledge”
You don’t need a crystal ball, if your money is diversified and planted safely, your money just needs time to flourish.
Mathematically, the benefits of diversification were proven Harry Markowitz in the 1950’s who went on to win the Nobel Prize in economics. The takeaway from that seminal paper is that diversification is the one tool in investing that truly lowers our risk without lowering return. A free lunch.
Practically: The size of today’s global markets gives investors a template for how to weight portfolios by country. Canada makes up 3% of world markets, the US 60%, Internal markets as a whole 24%, and Emerging Markets 13.
The benefits of diversification take hold when a portfolio contains over 100 individual companies per country. But ideally, diversification by company would be in the thousands.
As you go through the day, think about your diversification. Is it global? Or over-concentrated to Canada? Is it spread across industries and sufficiently varied by individual positions?
The ideas in these episodes are not mine alone and are based on my learning of time-tested principles. I am grateful for the work that has been done by people like Naval Ravikant, Eckhart Tolle, James Clear, Morgan Housel, Nick Maggiulli, Brian Portnoy, Derek Sivers, Carl Richards, Cameron Passmore, Benjamin Felix, Michael Kitces, and many others.
How I Invest My Money – Joshua Brown and Brian Portnoy
World Equity Weights source - Dimensional Fund Advisors
H. Bessembinder, “Do Stocks Outperform Treasury bills?” (May2018).
This content is for informational purposes only and should not be construed as advice or recommendation. Past performance does not guarantee future results. Please consult a licensed financial professional before making any investment decisions.