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Talkin' Shop: The Pain of Diversification

Eric discusses how the performance of the individual positions within a portfolio may be painful but necessary for a successful diversified strategy.

Transcript

Eric: It always amazes me how the individual components themselves are incredibly painful.

If we took our fund and broke it out and showed each line item to people, every single day, every week, every month they would find something to be upset about. But that’s the nature of diversification, if everything went up and down together you wouldn’t be diversified.

We have the macro portion, and then we have just the equities portion, and then we have the cash management portion. Then you can take the macro portion and break it up into metals, grains, energy, soft commodities, bonds, so on and so forth. Each one of those individual pieces is very painful because they move very differently from the stock market. They can have drawdowns, be out of favor for months. And also those positions that don’t move differently from the stock market, just being long stocks, like equity beta is painful too.

On our equity positions during Covid we were down thirty three percent just like everyone else on our dedicated long only equity positions. What saved us was the diversifying nature of all the other stuff going on in the portfolio. The individual pieces of the macro strategy. Which is the job of the macro portfolio.

So, yes, there is a lot of pain in there individually, but something happens when you wrap them all up into one portfolio. You get the benefits of portfolio theory. All we’re doing is implementing modern portfolio theory but taking it to its natural conclusion by including all of the assets and strategies that are truly diversifying in nature.

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