Diversifying for More Return

The common misconception is that diversifying means giving up return. This has been shouted for years at market participants. Well, today is the day that we make diversifying the cool thing to do. The SWP uses six asset classes and selectively allocates them based on the macro-economic environment. When we have an options trading strategy like the environmental options trades I currently run, we can diversify and have greater returns. Here is a graph of the “HOLY GRAIL” as presented by Ray Dalio.

The beauty of this chart is the focus on the Return to Risk Ratio. One of the greatest takeaways I obtained when moving from being a retail trader to being a professional trader was a shift from a “return-oriented focus”. As a retail trader/investor, I thought it was all about return. In truth that is only one half of the equation, and the less important one at that. The units of return for every unit of risk is the true focal point of a risk manager.
After taking care of the risk, we can begin to ramp up the return we are desiring. For instance, when paring options with SWP we can actually reduce the risk of the portfolio simply by adding an uncorrelated income stream. Then to top it off, it significantly improved the returns as well. This is the true power of diversifying.

Diversifying is the greatest edge in markets that is so overlooked. It's important to do, and it dramatically increased returns. If we ever want more, then we just leverage up, and bang, more returns.