A single unexpected event can often set things on a completely different path. That is as relevant for markets now more than ever.
While no one can predict how equity markets will move, black swan events can emerge suddenly and unexpectedly leading to sharp swings in volatility and valuations.
It is during times when the macroeconomic environment is volatile that the basic tenets of investing become more important.
One well-known professor, Hendrik Bessembinder, of Arizona State University, has argued the entire gain in the US stockmarket since 1926 is attributable to the best-performing 4% of listed companies.
So being selective and choosing the right companies can be highly rewarding.
However, the problem with highly concentrated portfolios is they are inherently risky and volatile. Get a few stocks wrong and they can make a big dent in returns.
Adding more stocks can spread risk and reduce volatility, but it may also dilute returns if they are merely second-best choices designed to play it safe and fill out the portfolio so that it hugs the index.
But there is a middle ground between over-diversification diluting returns and staying diversified to manage risk and volatility yet still delivering alpha. Investors should not run scared, instead go back to basics.
A strategy of diversified, high-conviction stocks and looking to the long term is one that can help protect ourselves from the vagaries of financial markets, and will be vital if we are to avoid the overall negative effects of events that often take markets by surprise.
The aim of not putting all your eggs in one basket is to provide differentiated sources of potential returns.
Investments that are not correlated have little relation to one another which means there should always be an engine for investment growth, irrespective of the economic weather.
Craig Baker is head of investments at Alliance Trust PLC and global CIO at Willis Towers Watson
• From volatility comes opportunity
• Differentiated sources of returns offer some protection
• Black Swan events spark highly unpredictable markets
• Highly-concentrated portfolios could be at risk