Why your portfolio is less diversified than you might think

WHAT is the best piece of investment advice you could fit into a single, short sentence? “Buy stocks” wins points for brevity and high returns. “Buy American stocks”, if given at almost any point over the past few decades, would have done even better. “Don’t waste money on stockpickers’ fees” deserves an honourable mention. Here is a less punchy suggestion: “A diversified portfolio can have the same returns as a concentrated one, with less risk.”

Diversification is such an important idea in modern finance that it is easy to forget its age. The economist it is most associated with is Harry Markowitz, who won a Nobel prize for setting out its maths in the 1950s. But the practice, if not the theory, was popular long before that. During the first heyday of financial globalisation, in the early 20th century, European investors could hardly get enough of foreign assets. A survey by Charles Conant, a journalist, published in 1908 estimated that between a quarter and a half of the average British portfolio was invested abroad. In French and German portfolios, overseas allocations were around a third and a half, respectively. Such cosmopolitanism was then shattered by war, hyperinflation, capital controls and the Depression.

More than a century on, and despite present-day worries of financial fragmentation, holding a varied portfolio is easier than ever. Foreign assets can be bought at the tap of a trading app, while cheap index funds give investors instant exposure to thousands of stocks in dozens of countries. The idea of diversifying across asset classes as well as geographies – via the classic 60/40 portfolio of stocks and bonds, for instance – is firmly in the mainstream. More exotic choices such as commodities and cryptocurrencies have become more accessible to retail investors, too, and private assets may eventually follow suit.