Warren Buffett said, “Investing is simple, but not easy.” You would think that if something were simple that it would be easy. However, in real life simplicity has little correlation with ease. Take losing weight. Very simple. Burn more calories than you take in. To be a successful investor all you have to do is buy low and sell at a higher price. Easy, right?
In the story of Alice in Wonderland, Alice arrives at a fork in the road and wonders aloud which road to take. A smiling Cheshire Cat appears and asks her what her destination is, to which she replies, “I don’t know.” The toothy cat then proffers the only possible response, “Well, then it doesn’t matter.”
At its core, diversification is deliberate uncertainty recognizing that it is difficult to know with particular subset of an asset class, or sector is likely to outperform another. Broad diversification, done effectively, seeks to capture the returns of different types of investments over time but with less volatility at any one time.