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Can these seven small-cap stocks buck the trend?

For the second year in a row, our once high-flying small cap screen has tanked. Does low diversification explain the dip?
August 21, 2023

According to billionaire money manager Ray Dalio, smart investing is all about diversification. He says the ‘Holy Grail’ of portfolio construction is to find at least 15 assets with a good probability of making money and whose returns are uncorrelated. As he tells it, the point is not to find the very best investments (although bully for you if you do) but instead to improve the portfolio’s expected return relative to its risk.

That’s the theory at least. Finding assets that are genuinely uncorrelated is difficult, as anyone who has lived through a liquidity crisis (or owns bitcoin) can attest.

A good chunk of the investment world is in Dalio’s camp. Modern portfolio theory states that up to a point, more assets can improve a portfolio’s overall returns without adding risk. Diversification is also a guiding principle behind index funds, even if buying the market technically involves an automated, rather than a selective, approach to investing.

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