We continue to face the challenge of integrating the new into the traditional, and trying to explain the current environment without all the distractions that naturally come from watching a market at work. This year, as we mark our third consecutive strong year for U.S. equities, it will be a challenge to reinforce the principles of portfolio diversification. This note will share some of the themes we will be talking about next week in Cambridge. The first principle establishes why you want a portfolio. This is easy.
Nobody is particularly good at picking the single best investment all the time.
Moreover, by adding a good number of less than perfectly correlated strategies, each of which is comprised of less than perfectly correlated securities, it is possible to achieve an expected rate of return with lower expected risk. Some people think of this as being the only free lunch in finance, and it is a powerful force in the long run. Having acknowledged the theoretical superiority of the portfolio approach to investing in the long run, it is ironic that we are never happy with the result. Psychologically, we seem incapable of letting go of the notion that we should have known better after the fact. Looking in the rear view mirror is not the way to test theories.