10/23/2017 0 Comments The Problem of DiversificationThe highlight of this week was my research assessment. I knew that I wanted to focus on some of the changes that occurred after the 2008 financial crisis, but I ended up finding a database with nearly all of Acadian’s Whitepages. These research papers gave me years worth of research from one of the world’s most prominent asset managers and will provide me with plenty of reference material in the future. For this research assessment, I focused on an article titled Crash Risk: Hedgers versus Harvesters, which focused on crash risk exposure in post-2008 portfolios.
One of the most interesting ideas that I learned this week is that diversification is not always the most advantageous strategy. After the global financial crisis (GFC), industries often didn’t exactly follow the simple flow of the economy and rather functioned more independently. For investors, this change caused some level of earnings variance between their individual holdings. Acadian found that more diversified portfolios after the GFC actually had lower average returns than portfolios that focused on one or two specific industries. This concept of lower diversification goes against almost everything that I have previously been taught and will adjust my portfolio to include less variable stocks, instead focusing on one specific speciality area. This discussion of diversification also got me thinking about my college applications. As I finish up some of my applications, I’m slowly realizing that I don’t really fit into the cookie cutter mold of what colleges say that they want. I’m not well rounded or diverse, have fair but not extraordinary test grades, and am not a part of many clubs. All of my time is devoted to investing, and although this work is giving me an advantage against the others in my industry, it may ending up hurting me in applications where they are looking for more well rounded students. There are a few instances where I do worry about not getting into my dream college, University of Pennsylvania, because of this reason, but I just have to keep reminding myself to not change my plans simply to make myself a better candidate. Everything that I do has a time horizon of at least ten years, and college is only a stepping stone to where I would like to be. To get to that final destination, all I can do is stick to my own dreams, trust in the process, and let my work speak for me.
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