Professor Charles D. Ellis of the Rebalance Investment Committee explains how diversification lowers the risk of unexpected losses in a portfolio, providing what Burton Malkiel calls “the only free lunch in investing.” Learn the basics of diversification from the managers who pioneered the concept.
Diversification says, “I don’t know everything, so I can’t make really smart decisions on specific pieces.” Give you an example: weather. Could you promise me that the 13th day of October is going to be a decent day? That there won’t be a rainstorm?
I can’t promise that sort of thing to you. And I’ll bet you can’t promise it to me. Diversification takes you toward climate and away from weather. Diversification takes you toward the normal experience. And diversification protects you from the unique, dreadful, whoever thought that something like that would happen to a nice person like me? One of the great phrases about diversification that Burt Malkiel uses over and over and over again, “It’s the only free lunch in all of investing.” Costs nothing to have it. And it’s enormously valuable.