Diversification - the magic ingredient

Many investors are tempted by tactical asset allocation - the practice of shifting a portfolio's weighting as the outlook chops and changes.

The reality is that it is hard to predict exactly how and when the market will react. To illustrate this point, let us look at a few scenarios. What will happen when the central bank responsible for a major reserve currency pushes up interest rates? Do you expect the value of long-dated bonds to rise or fall? Here's another scenario: a new president is elected to lead a large Western superpower, promising to cut taxes and increase public spending. A client calls, wishing to invest in that country's equities. More money flowing through the system will be good for business, she reaso...