Diversification feels boring until it doesn't

If you own a diversified portfolio, then in any given year something in it is probably lagging. A part of the stock market, a corner of the bond market, a region of the world. You look at the statement, you see the laggard, and a little voice says: why do I own that?

I hear that voice a lot, and I understand it. Nobody opens a statement hoping to be reminded of the slowest piece. But the slow piece is not a mistake. It is the price of owning the things that will matter in a year when the current leaders stumble.

Nobody knows which part leads next

The trouble with concentrating in whatever has worked recently is that leadership changes, and it rarely announces the date. A portfolio built around yesterday's winners is really a bet that yesterday repeats. Sometimes it does. Often it does not, and the turn tends to arrive when it is least convenient.

Diversification does not promise the best result in any single year. It promises something quieter: that no single surprise gets to decide how your plan turns out.

What to ask instead

Rather than asking whether each holding is winning, I find these questions more useful:

• What is this money for, and when will I need it?
• If my largest holding fell sharply, would my plan still work?
• Am I diversified across the things that actually drive returns, or just across names?
• What am I paying to own all of this?

None of those has a thrilling answer. That is rather the idea. Boring, in investing, is often another word for durable.

John