How To Diversify A Portfolio: Two Strategies You NEED To Consider

Are You Thinking About Investing All Wrong?

Many investors focus too much on being “right” rather than maximizing their returns when they are. Today, we’ll break down a fascinating concept from Mauboussin and Callahan's latest paper, "Probabilities and Payoffs: The Practicality and Psychology of Expected Value" to explore how embracing uncertainty and diversification can potentially improve portfolio outcomes.

Key topics:
• The Babe Ruth effect: Why investing success isn't about being right all the time
• The power of extreme outcomes and how distributions impact portfolio returns
• The difference between negative and positive skewness in asset selection
• Why path dependency can make or break your investment results
• Three key tips to improve your portfolio resilience

Timestamps:
00:00 – Intro - Probabilities & Payoffs
00:30 – The Babe Ruth Effect
02:40 – Frequency vs. Magnitude
04:13 – Path Dependency
05:32 – Tip #1
06:07 – Tip #2
06:31 – Tip #3
06:53 – Conclusion: Survive!

Sources:
Mauboussin, Michael J., and Callahan Dan. “Probabilities and Payoffs: The Practicalities and Psychology of Expected Value.” Counterpoint Global Insights by Morgan Stanley Investment Management, February 19, 2025. (https://www.morganstanley.com/im/publ...)

Ole Peters, “The Ergodicity Problem in Economics,” Nature Physics, Vol. 15, December 2019, 1216-1221

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