I got an email from a reader last week that stopped me mid-sip of coffee. “I’m diversified!” it began. “I own thirty stocks! But when the market has a bad day, my entire portfolio is red. Every single stock. What am I doing wrong?”
I knew exactly what was wrong. I’ve been there myself. Early in my career, I thought diversification was a numbers game. I’d proudly built a portfolio of forty companies. I was a regular Gordon Gekko, minus the suspenders and the illegal insider trading. Then, the dot-com bubble burst.
It wasn't pretty. My forty stocks weren't forty unique stories; they were forty slightly different versions of the same story. They were all “high-growth tech.” When that one narrative went out of fashion, it didn’t matter how many tickets I held—the entire show was canceled. I wasn't diversified. I was just multiplied.
That painful, expensive lesson taught me the single most important principle of true diversification: it’s not about owning more things. It’s about owning different kinds of things. It’s about building a portfolio with your topics multiple stories.
What Does a "Story" Actually Mean in Your Portfolio?
When I say "story," I don't mean a slick pitch from a Wall Street analyst or the hype on social media. I’m talking about the fundamental, underlying engine of a company's returns—the economic narrative that drives its profits, regardless of day-to-day stock price noise.
Think of it like this: if your portfolio was a newspaper, would every section be the same? Imagine opening The Plus News and finding the Sports section, the Business section, and the Arts section all just writing about the local football team. You’d cancel your subscription immediately. It’s not useful. Yet, that’s exactly what many investors do. They own a tech stock, a different tech stock, a tech-focused consumer discretionary stock, and a tech-heavy ETF. They’re reading the same story on every page.
A true "story" is a distinct economic driver. It’s the reason a company makes money when another doesn’t. Is its growth fueled by commodity prices? Interest rates? Consumer spending on luxury goods? Technological disruption? These are the different sections of your financial newspaper.
The Illusion of Diversification: It’s a Trap!
We’re tricked into believing we’re safe because we own a bunch of different names. This is the illusion of diversification, and it’s the most common mistake I see. You might own Company A that makes microchips and Company B that makes the software that runs on them. They’re different companies! Different CEOs! Different ticker symbols!
But here’s the thing: they both live and die by the same story: the health of the tech hardware cycle. If companies slow their IT spending, both stocks are getting hit. Hard. You’ve doubled down on a single narrative, effectively making a concentrated bet while thinking you’re playing it safe.
It’s like believing you’re prepared for all weather because you own three raincoats and a sturdy umbrella. You’re covered for a storm, sure. But what happens when the sun comes out and everyone else is selling sunscreen? You’re stuck. Your closet lacks narrative diversity. True diversification means also owning shorts, a winter parka, and some comfortable spring-time sneakers. You’re preparing for different economic seasons, not just different versions of the same storm.
The Core Stories Every Portfolio Needs
So, what are these different "sections" of the newspaper? While every investor’s mix will be different, I believe there are a few core, non-correlated stories that form a robust foundation. You don't need to own all of them, but you should understand which ones you have—and which ones you’re missing.
First, you have The Growth Story. This is the exciting one everyone loves. It’s about companies expanding rapidly, entering new markets, and disrupting old ones. Their value is in their future potential. Think innovative tech or biotech. The risk? If growth slows, the story falls apart quickly.
Then, there’s The Value Story. This is the contrarian play. It’s the beaten-down company trading for less than its intrinsic worth. The story here is one of turnaround, of a market mispricing an asset, of patient capital being rewarded. It’s not sexy, but it’s the bedrock for many legendary investors.
You also need The Income Story. This isn’t just for retirees. This is the story of steady, reliable cash flow. Companies like established utilities or consumer staples fall here. They may not shoot the lights out, but they pay you consistently to own them, through dividends. Their story is one of resilience and dependability, a ballast in rough seas.
Finally, consider The Inflation/Deflation Story. This is about real assets. How do you perform if the value of money itself changes? Assets like gold, certain commodities, or real estate investment trusts (REITs) tell this story. They often move on a different beat than the rest of the market.
How to Audit Your Portfolio’s Narrative
Okay, time for some homework. This is where the rubber meets the road. Open your brokerage statement. I’ll wait.
Now, I want you to look at each holding and ask one simple question: “Why will this company make money?”
Not “why will the stock go up?”—that’s a different, and far more fickle, question. Why will the business generate profits? Is it because the global economy is booming and people are buying more stuff (a cyclical story)? Is it because they have a subscription model that’s immune to economic swings (a defensive story)? Is it because interest rates are falling and their debt is cheaper (a financial story)?
You’ll start to see patterns emerge. You’ll likely find that 70% of your capital is tied to one or two core narratives. Maybe it’s “low interest rates are good for tech growth.” That’s a fine story, until it isn’t. The goal of this audit isn’t to sell everything. It’s to identify the gaps. It’s to see that your newspaper is all Business section and has no Lifestyle or International coverage.
The Role of ETFs and Funds (And Their Hidden Danger)
“But,” you might say, “I just own a few ETFs like the ones from Morningstar’s top-rated list. That’s diversified, right?”
Well, yes and no. A broad-market S&P 500 ETF is diversified across 500 companies. But let’s be honest—it’s overwhelmingly diversified into one primary story: the health of large American corporations. It’s a fantastic, core holding, but it’s still primarily one narrative.
The hidden danger of many thematic ETFs is that they often package a single story and make it look diversified. A robotics ETF might hold 40 companies, but if a new regulation stifles automation, all 40 are going to feel the pain. You’ve bought a concentrated story and paid an ETF fee for the privilege. Use funds as tools to efficiently gain exposure to a story you want, not as a magic diversification bullet.
Embracing the Boring (It’s How You Win)
The hardest part of building a portfolio of multiple stories is the boredom. Seriously. When one of your stories is hot—say, growth is soaring—your value and income stories will look dead in the water. You’ll stare at those flatlined stocks and think, “Why do I own this garbage? I should sell it and buy more of what’s working!”
Don’t. That’s the siren song that leads back to the rocks of concentrated risk.
The entire point is that they’re not all supposed to work at the same time. Their lack of correlation is the feature, not the bug. When growth stocks are getting hammered by rising rates, your value and income stories should be providing crucial stability. They’re your defensive line, allowing your offense to rest and regroup. You win the long-term game by not losing badly in the downturns.
Getting Started: Weaving Your First New Story
You don’t need to overhaul your portfolio tomorrow. This is a marathon. Start small. After your audit, you might realize you have zero exposure to international markets. That’s a whole other set of stories—different economic cycles, different currencies, different growth trajectories.
So, maybe you start by dedicating 5% of new investment capital to a broad international ETF. You’re not betting the farm. You’re simply adding a new section to your newspaper. You’re now covering World News. Next quarter, maybe you see you have no real assets. You add a sliver of a REIT or a commodity fund. Now you have a Weather section.
Slowly, deliberately, you build a portfolio that is truly resilient because it’s built on a foundation of multiple, independent narratives. It won’t always be the top performer in a bull market. But it will be the portfolio that lets you sleep at night, that survives the bear markets, and that compounds wealth steadily over the decades. And that, my friend, is the only story that truly matters.
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