Trader Series, Cognitive Enhancement and Learning Methodology Series (6)
Diversified Investment
The superficial understanding of diversified investment is simply spreading funds across different asset classes, but its deeper meaning is the fundamental diversification of risk factors.
True diversification is not about holding assets with different names, but about holding assets driven by different risk factors. Assets that appear unrelated on the surface may be driven by the same risk factors, leading to simultaneous declines under market pressure.
For example, when problems arise in the United States, assets like U.S. stocks, U.S. bonds, and steel will all decline simultaneously, while safe-haven assets like gold and the Japanese yen may rise. Deeper diversification requires understanding the sources of risk, the drivers of returns, and the performance characteristics of various assets in different market environments.
This means going beyond simple asset class classification and deeply studying the performance patterns of assets under different economic cycles, inflation environments, and geopolitical conditions.
Effective diversification also includes diversity at the strategy level, meaning applying different trading methods and investment time horizons simultaneously. This comprehensive diversification strategy allows portfolios to maintain resilience in various market conditions, rather than only performing well under specific circumstances.
True diversification lies in building an investment system that can survive and achieve reasonable returns in unknown and unpredictable future environments.
