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2. The market meltdowns of 2001 and 2008 exposed diversification's inability to manage risk when it's underlying principle of correlation broke down when needed most.
But many investors may not be aware of diversification's importance.
Diversification's primary power is that it lets us reduce risks that are avoidable.
The increased correlations limit, but do not eliminate, diversification's value.
This leads to the second, and more important, fallacy in most investors' conception of diversification: diversification's downside danger.
Yes, there are differences in growth rates, inflation, etc., among countries, but not so great — or predictable — that you can exploit them long term for diversification's sake.
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To illustrate the value of diversification, let's focus on two extreme periods.
Asked to comment on the differences between SolarCity and Mosaic's offerings, Tim Newell, SolarCity's vice president for financial products, highlighted the advantages of his product's diversification: SolarCity's bonds are being backed by the cash flows from its solar leases around the country.
Despite their diversification, Hollywood's entertainment boutiques are threatened.
Yet despite such energetic diversification, Toronto's bread and butter remains the championing of serious mainstream cinema, screened to the public alongside the press, with celebrity bells and whistles but less of the pomp of Cannes or Venice.
Novelty and Diversification: UOB's deal provided a rare opportunity for European capital market investors to put Singaporean residential loan exposures into their portfolio without incurring currency or interest rate risk.
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