To start with a surprise: investment management, when boiled down to basic principles, is very simple. If you look at your investment portfolio as lifetime capital – meaning you set a planning horizon of at least 10 years (preferably 20) and think about what is good for that time frame and what is not – you’ll come to the same conclusions: 1) an emphasis on stocks makes sense, as they tend to grow over the long term; 2) diversification is very important.

Anyone who has read even a little about finance, or even just invests recklessly at their own risk, understands deep down that the principle of diversifying eggs into different baskets is absolutely fundamental. The famous portfolio theory theorist, American economist Harry Markowitz, called diversification “free cheese”.

In the mid-20th century, he wrote an article titled “Portfolio Selection” about the risks, returns, and correlation of investment instruments. Its main idea was that risk should be considered in relation to the portfolio as a whole, not in relation to individual securities. The article became the starting point for modern portfolio theory, and Markowitz received the Nobel Prize.

We’ve spent our whole lives proving and explaining that “the only free cheese is in the mousetrap”, but the fact is that with diversification, you can reduce risk for any chosen level of return, and for any level of risk, you can try to increase returns. Cool, isn’t it?