Talk:Diversification

The current page (as of July 26, 2019) presents a controversial definition of diversification which can be misleading for Bogleheads members. Selecting asset subclasses with the objective of increasing risk-adjusted returns is a technique that effectively concentrates a portfolio into sub-markets.

When financial authors discuss broad diversification, they use the traditional meaning of diversification that is about spreading one's money broadly across a market based on (float-adjusted) market capitalization (not equal-weighted across securities for obvious arithmetic reasons).

More importantly, the fourth principle ("Diversify") of the Bogleheads investment philosophy uses the traditional meaning of diversification: "Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. This guarantees they will receive the average return of all investors. Being average sounds bad, but it is actually a great thing."

The proper way associate the technique for asset subclass selection in the hope of increasing risk-adjusted returns with the word diversification would be to say "diversify across sources of returns" to avoid misleading readers.

I suggest putting a LARGE WARNING at this point on this page, until it is rewritten to present both definitions of diversification: --longinvest 13:05, 26 July 2019 (UTC)
 * Main definition: Broad diversification (generally accepted, based on mathematical principles like William Sharpe's The Arithmetic of Active Management article)
 * Alternate definition: Diversification across sources of returns (controversial due to its reliance on statistical studies of historical return data of asset subclasses).