Building a Diversified Portfolio for the Long-Term

A Horse Race of Diversifying Strategies

March 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Most diversifying strategies fail to provide diversification benefits when most needed
  • We build a diversified portfolio via trend, multi-factor, and long volatility
  • An equal-weighted approach to asset allocation is not worse than more complex approaches


At FactorResearch, we have published more than 200 research articles on investing, which included diverse topics ranging from statistical arbitrage hedge funds to catastrophe bond investing. All research aims to provide an independent perspective based on data rather than opinions. It is a constant search for truth and knowledge.

It has also been a continuous source of disappointment, where some of the key lessons learned are the following:

  • The alpha generated by mutual funds, hedge funds, and cryptocurrency hedge funds is essentially zero 
  • Almost all diversifying strategies do not diversify and fail when most needed by investors
  • Private asset classes like private equity, venture capital, or real estate are just equity exposure in disguise and provide little value
  • Bonds lose most of their appeal when interest rates are close to zero
  • Almost all investments are proxies for economic growth, which can be viewed as an undiversified short volatility position

Unfortunately, this implies that 95% of the investment products available on the market do not add real value to investors. It is a negative and perhaps arrogant perspective, but based on an unbiased and thorough analysis of data (try Finominal’s Alpha Analyzer for alpha and contribution analysis).

Investing is always challenging, but perhaps more difficult now than ever. Valuations are at record highs, debt is at record highs, and demographics are negative in most countries, which will depress future economic growth. The outlook for returns is mediocre at best (read Musing about S&P 500 Valuations).

However, not investing is also not an option given moderate levels of inflation and negative real returns on cash accounts. In this research note, we will explore a diversified portfolio fo