Unnecessary Risks are Unnecessary
Diversification is the only free lunch in finance.
— Dr. Harry Markowitz, Nobel Laureate in Economics
The Golden Gate Bridge in San Francisco is one of the most beautiful and iconic bridges in the world. It is also a good way to think about your pathway to retirement — from the hustle and bustle of the city (work) to the calm, rolling hills (retirement).
But first, you have to cross the bridge. Seems easy enough. But what if they removed the guardrails? Where would you drive? Along the edges, with nothing to stop you from plummeting into the waters below? Or right down the middle?
When it comes to your retirement portfolio, you drive down the middle of the bridge via a broadly-diversified portfolio that holds thousands of companies around the world.
The less diversified you are, the closer you will get to the edge of the bridge. Sometimes this could mean higher returns, but it also might mean — potentially — much greater losses.
With a globally-diversified portfolio, you won’t be the single best performer in any period, but you also have fewer reasons to worry about poor returns from a single asset class. And that keeps your portfolio in the center of the bridge as you head towards retirement.
For most of us, whether we are crossing a bridge or investing, we want to follow a safer path. Our future is too important to risk.