Market Multiverse

Investing isn’t just a quest for wealth; it’s an exhilarating journey of self-discovery and awareness. This holistic approach differs starkly from the narrow focus solely on financial gains, often ignoring the deeper emotional and intellectual gratification that investment can bring. A standout example of this enriched experience is the art of diversifying your investment portfolio.

Think of diversification in investing like a culinary adventure. Just like savoring a variety of cuisines is more delightful than sticking to the same meal, a diversified portfolio brings a zest of continuous discovery and learning. Each new asset you add is like a new spice, enhancing the flavour and potential of your investment feast, keeping you eager and hopeful.

Embracing diversification is acknowledging the mystery of the future. It’s a shield against the unpredictable and a hedge against our own overconfidence (A concentrated portfolio is often a sign of overconfidence). If we could predict the future with certainty, why would we need more than one winning asset?

Yet, here’s the twist: diversification is not easy. It’s a behavioral challenge. To diversify effectively means holding onto assets that might underwhelm or are expected to. If every asset in your portfolio is growing in unison, chances are you’re not truly diversified.

In a well-mixed portfolio, you’ll find some winners and some stragglers. It’s tempting to want to tweak this mix – to drop the underachievers and double down on the winners. But that’s where the trap lies. There’s a deceptive comfort in focusing only on the winning assets. Everything looks rosy, but this is a short-lived comfort that blindsides you with long-term risks.

Our behavioral biases often put diversification at risk. We’re swayed to believe that our winning investments will keep on winning forever. Conversely, we write off the underperformers too soon, convinced they’re doomed. When we look back at our portfolio’s performance, diversification can seem like an error, especially when hindsight glorifies our winners.

Keeping a diversified portfolio is an ongoing battle against our instincts. When you no longer see value in diversifying your portfolio, remember these two critical points:

  1. The Future is Unknown: Markets are dynamic; what’s ahead is unknown and unpredictable.
  2. Hindsight is 20/20: Looking back at our portfolio, we must acknowledge that things could have turned out differently. The market’s complexity means multiple outcomes were always possible.

To diversify means to willingly include underperforming assets. It doesn’t mean clinging to any investment blindly, but understanding that a mix of different performers is essential for true diversification.

In the investment world, nothing is ever certain. It is one of the few fields where the right decision can lead to the wrong outcome, and where pure dumb luck can outperform skill. John Maynard Keynes put it eloquently when he said, “Markets can remain irrational longer than you can remain solvent”.

Good investing often comes down to just not being stupid, which means self-awareness and control. Diversification is an effective strategy in helping us manage our emotional challenges. The key challenge here is the lingering thought of ‘what could have been’…also known as greed.

By grasping these subtleties, investors can better maneuver through the nuances of diversification, striking a balance between long-term conviction and enjoyment in their investment journey. This approach turns investing from a mere financial endeavor into an engaging and fulfilling experience that helps us figure out who we are, and what we want.

Contact Luthuli Capital today for a consultation and we’ll help you get started on your pilgrimage.

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