Why Diversification Rarely Feels Right

Why Diversification Is Often Misunderstood 

Diversification is usually explained as a way to improve returns, but that explanation misses the point. 

Diversification is not primarily about return, it’s about behaviour. 

What diversification actually does 

A diversified portfolio spreads exposure across different assets. 

The result is that something is almost always disappointing. 

This can feel frustrating. But that frustration serves a purpose. 

It prevents any one outcome from dominating the experience. 

The role of regret in decision-making 

Regret is powerful. 

It pushes people to: 

• Chase what has recently performed well 
• Abandon what has disappointed 
• Make changes based on hindsight 

These decisions often feel justified at the time.  Over the long term, they tend to reduce outcomes. 

Diversification reduces the intensity of regret.  Not by eliminating disappointment, but by spreading it. 

Why this matters for long-term planning 

For people approaching retirement, large swings in confidence can be damaging. 

Confidence affects: 

• Willingness to stay invested 
• Ability to tolerate volatility 
• Capacity to avoid forced decisions 

Diversification supports steadier behaviour, even when markets are uneven. 

A realistic expectation 

A well-diversified portfolio will never feel perfect. There will always be something that looks like a mistake in hindsight. 

That is not a failure of diversification. It is evidence that it is doing its job. 

By reducing regret, diversification helps people stay the course. 

And staying the course is often what matters most. 

This information is general in nature and does not take into account your personal objectives, financial situation, or needs.  You should consider whether it is appropriate for your circumstances before acting.