Ken Fisher: Why Diversification Is Often Misunderstood
Ken Fisher explains that true diversification is widely misunderstood. Rather than simply buying many different things, proper diversification involves combining assets that have similar long-term return expectations but move in opposite directions in the short term, resulting in a smoother path to returns with less volatility.
Summary
In this short clip, Ken Fisher addresses a common question he receives about building a well-diversified portfolio. He begins by noting that people typically want him to prescribe specific percentage allocations across asset types, but he argues that such prescriptions miss the deeper point about what diversification actually means.
Fisher contends that diversification has been misunderstood throughout most of investment history. The true definition, according to Fisher, is not about owning a large number of different assets, but rather about identifying assets that share similar long-term return expectations while exhibiting inverse or uncorrelated short-term price movements — meaning when one rises, the other tends to fall, and vice versa.
When these types of assets are blended together in a portfolio, the investor captures the long-term return that both asset classes are expected to deliver, but experiences less volatility along the way. Fisher uses clear language to distinguish between 'buying a lot of different things' — which many investors mistake for diversification — and the mathematically grounded concept of pairing assets whose short-term movements offset each other while converging on similar long-term outcomes. The result is a smoother investment journey toward long-term financial goals.
Key Insights
- Fisher argues that diversification does not mean what most people throughout history have thought it means — the common understanding is fundamentally flawed.
- Fisher defines proper diversification as identifying assets with similar long-term return expectations that move inversely to each other in the short term.
- Fisher claims that blending inversely correlated assets together allows an investor to capture the long-term return with reduced volatility on the path to achieving it.
- Fisher distinguishes between genuine diversification and simply 'buying a lot of different things,' arguing the latter is a widespread misconception.
- Fisher rejects the popular framing of diversification as specific percentage allocations (X% of this, Y% of that), arguing it prevents investors from truly understanding the underlying concept.
Topics
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