The Right Way to Diversify

"Don't put all your eggs in one basket" is an oft-chanted mantra among investment advisers. Many investors equate diversification with portfolio allocation, defined as spreading assets among generally uncorrelated vehicles such as stocks, bonds and cash.

But what this really boils down to is a method that tries to guarantee mediocre returns by watering down the best performers with losers to protect against the "risky" side of your investments.

The trend-follower's view of diversification is completely different. While portfolio allocation is a way to hedge your bets and minimize your losses, trend-following diversification is a way to boost your investments' performance. ...