Buy and hold or static diversification
While many investors know about diversification, few understand the difference between dynamic diversification and static diversification.
Diversification means putting one's money into several investments. This can achieve a better performance because even if one of the investments loses money, the others might earn money, resulting in a portfolio that is more stable than any individual investment.
There are several mistakes that people commonly make when diversifying their portfolio. First, simply putting one's money into several investments does not constitute diversification. This is because many investments behave similarly. More precisely, many investments are highly correlated with each other. This means that when one of them gains, the others gain as well; and when one of them loses, the others lose as well. Putting one's money in several such investments is similar to just putting it all into one of them. If two investments are highly correlated, then investing in both of them will not lower the portfolio risk.
Another pitfall that is often made is called buy and hold or static diversification. This means following a simplistic allocation rule that is based on very long-term data. An example of such a rule might be "70% stocks / 30% bonds". Such rules of thumb might sound good at first, since they are based on a lot of data.
One problem with buy and hold is that it does not respond to changing market conditions. In the above example, an investor would keep 70% of his money in stocks, even during the times when stocks severely underperform bonds.
Another issue is that in this approach recommendations are often too vague. Even if we buy the idea that we should always keep 70% of the money in stocks and 30% in bonds, the obvious questions becomes: Which stocks and which bonds? In a sense, the recommendation is a non-recommendation because there are so many different countries, sectors, and asset types to choose from.
The proper approach to diversification, the approach that we take, is asset allocation that responds to changing market conditions. When stocks are doing well, we can have all or most of our money in stocks. But when stocks are doing poorly, we do not need to keep any of our money in them.
Also, of course, we make very specific recommendations. You will never find us recommending that you put some money into "stocks". We give you the specific name and symbol of the investment and the specific percent of your money that should go into that investment.