The spice of life is variety. [It’s also a curry house in Glasgow, now sadly defunct.] Achieving variety by diversifying your assets has been an innate part of human risk management from time immemorial. Why else did the English Plantagenet kings maintain their claim to the French throne for so long? All investors, however, not just medieval royal families, have to consider how best to diversify the risks to which their wealth is exposed – whether they’re managing their own money or doing it professionally. For regulatory as well as theoretical and philosophical reasons, most UK investors actively seek portfolio diversification. Increasingly, as the advice industry becomes ever more regulated, advisers are making use of multi-asset, multi-manager products as a one-stop shop, especially as the asset management industry has become increasingly attuned to the opportunities and benefits of scale they can offer. Yet at this particular point in time, in an economic and financial environment unlike any we have experienced in the modern era, how exactly to achieve meaningful diversification is an increasingly difficult question. American economist Harry Markowitz is generally credited with developing and popularising the modern approach to diversification, as part of his doctoral thesis in 1952. Markowitz’s 60/40 equity/bond portfolio quickly became a staple of retail investor portfolios, and for many years equity and bond portfolios built around this basic concept have been highly successful for investors. Over the last thirty years in particular, the risk parity model, pioneered by investor and philanthropist Ray Dalio and his Bridgewater All Weather hedge fund, has achieved enormous success. The targeted aim of this model is a more equal split of realised risk/volatility between asset classes, and it is built on a more sophisticated version of the staple equity/bond approach. The success of this diversified approach in providing superior returns while also dampening volatility can be seen from the historic returns. The graph below shows returns from a 60/40 portfolio in the US since 2003, rebased monthly. Returns are shown on a log scale to reduce recency bias.