What is the composition of a typical Indian movie? Some drama or action, but often both. A few songs. A few fight sequences. Some comedy. It’s almost always a mix of everything. Leaving anything out is so uncommon that such a deviation will be talked about whenever such a movie comes out.
Why do movie makers do this? Why do they add everything to the movie even when some elements (such as comedy or fight sequences) are unnecessary for the story? Because movie making is a business, and the producers want to make money. Audiences may not like the hero’s face, but they may come in to see the heroine. Audiences may not like the songs, but they may come in for the comedy. Essentially, the producers are spreading their bets.
This is not very different from multi-asset investment portfolios. We add equity, bonds, gold, and maybe even cash. We add all that to make an “all weather” portfolio that can navigate any and all challenges that may arise in future.
If you are making a movie for one individual person to watch, you can just do what that person would enjoy. If you are making a movie for me, you can rip off songs and fights. Just give me the drama with beautiful imagery and good dialogues, and I am happy. But no one’s making a movie for just one kind of audience; they want to attract as many diverse kinds of people as they can.
Likewise, for any investment duration, there definitely is a single “winner” asset. If we put all our money in that one asset, we’ll come out with the maximum possible gain. Unfortunately, though, we cannot know that asset in advance; we can know it only after our investment duration has passed. So, in preparation for an uncertain future, we spread our bets into multiple asset classes.
Multi-asset portfolios are a compromise by definition. You could also argue that investors choose multi-asset portfolios only when they don’t have conviction in any asset class. I think Warren Buffett has an equity-only portfolio. But most of us aren’t Warren Buffett; multi-asset portfolios are the right choice for ordinary people like you and I.
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