Tail Risks & Correlation - The Real Killer
When SHTF everything gets covered...with poo
Everyone knows a little diversification is good.
If you took a financial econ class or follow finance twitter you may even know it doesn’t take much to reach sufficient diversification. Often ~30 stocks is enough to hit ‘sufficient’ diversification.
And if you have been on this earth for more than 25 years, you definitely know that the S&P500 owned as a passive ETF is literally peak investment prowess and no one has ever beaten it so “Buy VOO and chill”. It is literally the most popular tweet ever and by law any self-respecting fintwitter has to post it once a day…(allright that one is purposefully cheeky).
But if 30 stocks is enough to ‘diversify’ then owning 500 as part of an index has to be super-diversified right?
And as established early, diversity is a strength…err wrong slogan - hard to keep all the slogans straight…diversification is good.
Well, if everyone knows that diversification is good, this is going to be a short post right? Well, as was once stated “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
-Mark Twain
With this weeks mini-crash on Monday where everything was red that had everyone in a panic as a backdrop, it seems like a good time to dive into what diversification is, what are you diversifying away from, the less talked about and more important correlation and regimes, and lastly is SP500 actually diversified despite owning >30 stocks.
This will be a good one.