You bought 5 different assets. Why doesn’t that yet mean your portfolio is diversified?
It seems logical:
5 assets → money is spread → risk is lower.
But there’s one problem.
Let’s imagine that all 5 assets depend on the same underlying factor—for example, companies from the same industry.
If that industry faces problems, all five assets can fall at the same time.
So formally you have five different positions, but the portfolio may still strongly depend on a single scenario.
Diversification doesn’t work just by the number of assets.
It’s important to look at:
🔹 which sectors they belong to;
🔹 which factors their prices depend on;
🔹 how strongly they move together.
That’s why a 5-asset portfolio can be less diversified than a 3-asset portfolio, if those three have different sources of risk.
Diversification isn’t about the number of assets. It’s about spreading risk.
#Investing #RiskManagement
It seems logical:
5 assets → money is spread → risk is lower.
But there’s one problem.
Let’s imagine that all 5 assets depend on the same underlying factor—for example, companies from the same industry.
If that industry faces problems, all five assets can fall at the same time.
So formally you have five different positions, but the portfolio may still strongly depend on a single scenario.
Diversification doesn’t work just by the number of assets.
It’s important to look at:
🔹 which sectors they belong to;
🔹 which factors their prices depend on;
🔹 how strongly they move together.
That’s why a 5-asset portfolio can be less diversified than a 3-asset portfolio, if those three have different sources of risk.
Diversification isn’t about the number of assets. It’s about spreading risk.
#Investing #RiskManagement
