John Plender’s recent article in the Financial Times discusses the failure of diversification with regards to the current economic bust. I thought it was interesting because his thesis has an “Austrian” element1: A more fundamental point is simply that diversification cannot work well in a credit bubble because virtually all asset categories are driven up by leverage. Then when the bubble bursts, deleveraging affects asset categories indiscriminately. I tend to agree that diversification cannot work well in a credit bubble, although I’m not sure “indiscriminate” is the appropriate way to describe the havoc wrought. When Plender says “indiscriminately”, what he means is that no amount of entrepreneurial insight was sufficient to avoid losses, and that only dumb luck could’ve kept investors above water. But losses aren’t exactly “indiscriminate”, instead, effects … Read entire article »