The long-standing view is that being diversified is better for the purpose of limiting losses. the data from the most recent decline from the peak in the market confirms, for now, that diversification doesn’t matter.
| DJIA | S&P 500 | |
| 1 day | -0.94% | -1.10% |
| 2 days | -4.06% | -4.35% |
| 3 days | -4.27% | -4.49% |
| 4 days | -4.12% | -4.52% |
| 5 days | -4.77% | -5.05% |
| 6 days | -5.48% | -5.83% |
As of October 11, 2018, and going backwards to October 3, 2018, the Dow Jones Industrial Average (DJIA) and S&P 500 have declined. However, the extent of the decline defies the norms of diversification and concentration in investments.
In all scenarios, the Dow Jones Industrial Average declined less than the S&P 500. As an example, from the October 3, peak to the present, the DJIA declined –5.19% while in the same covered period, the S&P 500 declined –5.56%.
Conventional wisdom says that concentrated portfolios should rise more and fall more than diversified portfolio. In theory, both the DJIA and S&P 500 are comprised with the same high quality stocks. Therefore, the comparisons is supposed to be like-for-like.
This brings us back to the October 9, 2007 to March 9, 2009 period, when the Dow and S&P 500 peaked and troughed, respectively. Strangely, the more concentrated Dow Jones Industrial Average, counter to the conventional wisdom, declined less than the S&P 500. The 3% difference seems to be small, however, the theory of diversification and its failure, suggests that the amount is huge.
