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Asset diversification is probably the most widely used method to reduce a portfolio’s risk.  It involves investing in various assets that have low correlation (tend to have different price behavior) to each other in an attempt to reduce overall risk of a portfolio.

By definition, asset diversification is avoiding or minimizing the damage to a portfolio’s value of any specific asset (unsystematic risk).  Having a diversified portfolio of many non-correlated assets is expected to eliminate or at least minimize the risk of any one asset.   

Asset diversification is a primary tenet of all of today’s popular investment theories that stresses the objective to passively buy-and-hold a diversified allocation of uncorrelated investments.  The majority of advisors in the financial advice industry endlessly preach (asset) diversification, diversification, diversification, but rarely focus on limitations of diversification.  This is likely because diversification has become so ingrained as the absolute in lowering risk. But all diversified buy-and-hold allocations have weaknesses.  

The two biggest weaknesses of asset diversification are:

  1. Asset diversification works, until it doesn’t. Correlations between different assets are not fixed, they will ebb-and-flow with changing market conditions.  During times of high market stress and macro-level bear market declines, assets can tend to correlate to each other (act and preform in a similar manner) and drastically diminish the merits of asset diversification as a useful method of loss-aversion risk management. The bear market from Oct-2007 to Mar–2009 saw many asset classes decline in concert with each other which resulted in much greater losses than investors were expecting.  It was the same during the 2000-2002 bear market.
  2. Asset diversification dilutes portfolio performance. Following asset diversification rules compels an investor to buy-and-hold underperforming assets at all times as a means of controlling and reducing risk. Continuing to hold unproductive assets will create a never-ending drag on portfolio values and performance over time.  

Strategy Diversification combines a variety of individual active and/or passive strategies into single portfolios with the intent of improving the long-term (loss-aversion) risk controls combined with better performance. 

There are many strategies that prove to be successful out-performers in short and intermediate-term periods.  Over longer time horizons, there are fewer strategies that are consistent top performers. We identify top performers in three strategy categories: (1) passive buy-and-hold, (2) value, and (3) momentum strategies.  On the side, there is plenty of material that helps explain the benefits of buy-and-hold. On the active side, we would recommend reading the work of author, James O’Shaughnessy, in his book, What Works on Wall Street. In each of his many editions of this classic on investing, he has always identified value investing and momentum investing as consistent long-term winning active strategies. 

But no individual strategy has ever proven to be a consistent top performer in the short-, intermediate- and long-term across all economic environments or market cycles. Even those few strategies that prove to be the best, most consistent performer over the long-term will have periods of underperformance. 

TrendCalc Dynamics combines those “best of the best” strategies into various combinations that together comprise a series of three basic portfolios and strategies. This series offers the investor three strategy suites: (1) Strategic Buy-and-Hold, (2) Active-Dynamics and (3) Hybrid-Dynamics.  These portfolios and strategies run the gamete from diversified low-volatility wealth preservation to concentrated maximum aggressive growth wealth creation.  Regardless of where a strategy might fall on the risk-reward investing continuum, all portfolios incorporate the objectives of growth and preservation in the decision-making process.

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