The Commodization of Diversification
I came across the piece on dshort.com, “Diversification Works Until it Doesn’t”, which shows how diversifcation can sometimes be a failed strategy during an “epic” downturn. He has a great graphic which I have inserted below:
I think diversifaction as a strategy was “overbought” in 2007. Think about it. Wall Street Brokers were all become “Wealth Managers”. Instead of selling tech stocks, they were selling “Comprehensive Asset Allocations”. At the same time you could buy an ETF which was the diversification equivalent of “crack” – a quick hit of diversification. While I believe it was done with good intention, diversifcation almost became an asset class itself because it was commoditized. Once a strategy becomes a tradable commodity, it too can be overbought and oversold, and unfortunately it so happens that when diversification is overbought EVERY asset class is thus overvalued and , well you see what happens.
Diversification itself has its advantages, and is a great strategy to save an investor from himself, but when it becomes a commodity and everyone’s using it, sometimes it becomes too expensive of a “product” to buy.