Is Diversification enough on its own?

Crystal Mirkazemi | WBN News – Vancouver | June 4, 2026 Subscription to WBN News is Free

Harry Markowitz won the Nobel Prize in Economics in 1990 for a paper he wrote in 1952. The idea at its core was elegant and revolutionary: risk is not just about the individual assets you own, but about how they move relative to each other. Combining assets with low correlation reduces overall portfolio volatility without sacrificing expected return. He called this the efficient frontier. We call it diversification.

The evidence for diversification is ironclad. In October 1987, the Dow Jones Industrial Average fell 22.6% in a single day, the largest one-day percentage drop in history. A diversified portfolio that included bonds, international equities, and real assets absorbed that blow far better than any concentrated equity position could have. In 2000, when the Nasdaq collapsed by 78% over two and a half years, investors who held diversified funds that included value stocks, small-caps, and bonds largely avoided the full carnage.

But here is where the story gets interesting: diversification is not the same as owning everything in equal amounts. The goal is risk-adjusted return by maximizing the return you earn per unit of risk you accept. And this is precisely where an active fund manager earns their fee.

"Diversification is the only free lunch in finance. But knowing which table to sit at — that's still a skill." After Nobel Laureate William Sharpe

The paradox of concentration: when conviction beats breadth

Here is a fact that passive investing advocates rarely discuss: the greatest wealth creation in market history has come not from broad diversification, but from concentrated bets made with conviction and research.

Warren Buffett is perhaps history's most studied investor who famously keeps Berkshire Hathaway's equity portfolio heavily concentrated. In recent years, Apple alone has represented over 40% of Berkshire's public equity holdings. Peter Lynch, who ran the Fidelity Magellan Fund from 1977 to 1990, generated annualized returns of approximately 29% over that period, which is nearly three times the S&P 500's performance by making bold, research-driven concentration calls.

The key insight is this: diversification protects against ignorance. Concentration, backed by deep research and disciplined risk management, is how outperformance is generated. A skilled active manager holds both truths simultaneously: they diversify enough to avoid catastrophic single-stock risk, while concentrating enough to generate alpha (excess return above the benchmark).

Article #029

Crystal Mirkazemi | WBN News – Vancouver Subscription to WBN News is Free

My mission is to empower you to think big and build solutions for your family and business. Every milestone of life's journey is a chance to appreciate a financial plan. As I always say: Your most significant asset to be independent lies in your attitude towards money.

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