PORTFOLIO DIVERSIFICATION

I always liked art and my favorites are the late XIX century impressionist painters. When I studied economy in Boston, I remember going to the Arts Museum and spending hours in front of the Renoir painting, dreaming that I would someday be able to buy one for my home. Renoir paintings are sold for millions of dollars and I have none so far, but I have met investors that keep a large part of their fortunes in famous paintings.

 When I advised them to diversify their money better, they told me that the paintings gave them pleasure, visual enjoyment, status quo and, if they need to leave the country at any point, they can take them along.

As Harry Markowitz more than fifty years ago and Charles Dow over a hundred, when we think about investments, our adrenaline levels begin to rise and the first thing that comes to mind is making money, become rich – or even richer – to then think about risk and, depending on our personalities, and even feel fear.

According to what we have been able to learn in the last sections there are different ways of quantifying risk, of scientifically measuring the probabilities of “earning” more money (or less) in this or that investment; we can also protect ourselves performing future operations (forwards), 30 but what is impossible to predict beforehand and with absolute certainty, is how much we are earning exactly and in what amount of time.

We can strive in working with every formula discovered to better choose the types of assets and investment markets; we can also perform a large number of analysis about the assets we are acquiring; get information in the best possible way; but there were always be a range of variables impossible to predict – imponderables -, which could cause all out calculations to fail and not fulfill the traced investment objectives in the end. Who even imagined the possibility of the Wall Street attacks on September 11th, 2001 and the paralyzing of markets worldwide?

While the dictionary tells us that imponderable are those circumstances which are difficult to foresee, the only way of protecting ourselves from these situations are, besides of performing studies indicated in preceding studies, through real and thorough diversification of the assets in which we intend to invest, considering the correlation between then and again, according to risk levels each of us – the investors – are willing to assume.