6. When Diversification Does Not Diversify
“It’s not enough to say I’m going to be able to buy and hold simply because I’m diversified.”
Mohamed El-Erian, chief executive at Pacific Investment Management Co., in June 2009
A few years back, 36-year-old Andy Vitus, an engineer working for a venture capital firm that invests in startup companies, was asked by his wife how much they could lose in a year, and he couldn’t answer the question. After going over his portfolio, he realized something: What he thought was diversification was nothing of the kind—most of his holdings tended to mimic one another, thwarting his attempts at diversifying, which for years, has been considered the Holy Grail of investing. “Very few people have a good feeling ...
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