Owning ten different tech stocks is not diversification; it's a concentrated bet on one economic outcome. A resilient portfolio includes assets that react differently to the same major stressors, like inflation, deflation, or a credit crunch. This requires holding a mix of equities, hard assets, commodities, and liquidity.

Stephen McLennan warns that setting fixed benchmark weights, such as a 60/40 reference portfolio, inadvertently causes teams to gravitate toward those targets. Allocators become hesitant to make substantial deviations even when market conditions dictate doing so—such as low bond yields in 2020-2021. Instead, OTPP treats the reference portfolio merely as a signal of board risk appetite and adopts flexible bands so teams are accountable for total risk-adjusted returns.

Owning multiple stocks or ETFs does not create a genuinely diversified portfolio. True diversification involves owning assets that react differently to various economic conditions like inflation, recession, and liquidity shifts. This means spreading capital across productive equities, real assets, commodities, hard money like gold, and one's own earning power.

A more robust diversification strategy involves spreading exposure across assets that behave differently under various macroeconomic environments like inflation, deflation, growth, and contraction. This provides better protection against uncertainty than simply mixing asset classes.

Mere statistical diversification often leads to concentration in market bubbles. A superior approach is "variegation"—intentionally creating a non-uniform portfolio with different industries, countries, and ballast assets like gold to build true resilience, much like a diverse garden.

The goal of diversification is to hold assets that behave differently. By design, some part of your portfolio will likely be underperforming at all times. Accepting this discomfort is a key feature of a well-constructed portfolio, not a bug to be fixed.

The sign of a working diversification strategy is having something in your portfolio that you're unhappy with. Chasing winners by selling the laggard is a common mistake that leads to buying high and selling low. The discomfort of holding an underperformer is proof the strategy is functioning as intended, not that it's failing.

Since 2020, even top-quartile stock pickers have faced extreme drawdowns with concentrated portfolios. A more diversified approach, holding more names than usual (e.g., 50-75 stocks for an institutional manager), has proven superior for mitigating risk and achieving better performance.

An allocator's job is like a composer's: balance the performance of individual managers (the melody) with their collective impact on the portfolio (the harmony). The most skillful compromises, often in the less obvious parts of the portfolio, create the best overall result.