What Is True Diversification?

I often reference the concept of True Diversification to my clients and fellow traders. 

Which often brings back questions about the meaning of that term.

First we’ll contrast true diversification to traditional diversification, which is simply owning/investing in a lot of different things. 

True diversification goes beyond “owning” and brings in short selling, income strategies, directional, multiple time frames, multiple strategy types, alternative markets, etc. 

Furthermore, True Diversification has the goal of being in more edges rather than trying to pick the one edge that appears to be the best. There is too much at risk when you throw away several good edges and try to focus on just one, precisely optimized edge.

Precise optimization is risky. 

It’s like being the kicker on an NFL football team.

The entire team can shed their blood, sweat, and tears for a three-hour game. But many times, it will all come down to the kicker to decide the game. 
Will the laces be lined up just right? Will he gauge the wind speed just right? Did he step off the right number of paces at just the right distance from the ball? 

If not, he alone could lose the game.  

If you are like me, you may see those pro kickers and say “it doesn’t look that hard”.

But have you ever watched those halftime competitions where “regular people” to try to kick the field goal to win a prize? That’s when something that appears to be routine for one person becomes almost laughably impossible for others to accomplish.  

Imagine if those same “regular” people had 11 burly football players charging at them, ten thousand screaming fans in the stadium, and millions more watching at home.  

The reality is that optimizing just one strategy is like a regular person trying to kick an NFL field goal.  

Yes, you could do it… sometimes. But, if you only had one chance — just one strategy — could you do it? Are you sure?  

By moving from single-strategy optimization to a truly diversified multi-strategy portfolio, you can trade in your high-pressure job as a kicker and become the manager of the team instead. 

Like a truly diversified portfolio, a good football team needs to have the right type of person for each position. A great team cannot put 11 kickers on the field or 11 quarterbacks. There needs to be fast guys running, and big guys on the line, and good leaders throwing the ball.

Like the manager of a team, your job is to find the right strategy for each market and the right strategy mix to complement your truly diversified portfolio.  

Can you imagine what it would be like to have a portfolio that not only includes a lot of different stocks and bonds, but also includes positions that make money when the market goes down? 

Well, to do this means you also have a lot to keep track of. That is why it’s super-valuable to add automation to your trading and investing to give you the best chance of executing a truly diversified portfolio consistently and correctly. 

-Andrew Falde

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