📉 How the Traditional View: “Diversify Across Asset Classes to reduce portfolio risk” is incomplete diversification
For decades, investors have been taught that diversification is the golden rule of portfolio construction. The logic sounds reasonable: don’t put all your eggs in one basket — spread your wealth across stocks, bonds, dividend-paying assets, international funds, and more. But here’s the problem: This approach assumes risk equals volatility, and that diversification between asset classes is the only path to reduce it optimally.
7/1/20253 min read
While diversification has some merits, most traditional portfolios (like the classic 60/40 mix) rely on beta exposure — passive exposure to market risk. They are not strategies, they are allocations. And without dynamic risk management, even a well-diversified beta portfolio can suffer large drawdowns when markets move together, as they often do in crises.
🎯 The Right Question: “How Much Should I Allocate to the Most Efficient Strategy?”
Let’s shift perspective. If a strategy is:
Actively risk-managed.
Demonstrated to deliver higher risk-adjusted returns (e.g., Sharpe ratio, Sortino ratio, maximum drawdown control).
Able to adapt across market regimes and preserve capital in downturns.
Then the real question becomes:
"Why wouldn't I allocate more to that strategy, even if it's concentrated in one asset class?"
In this framing, strategy matters more than asset class, and risk-adjusted return matters more than raw return.
📈 What Is Risk-Adjusted Return?
Risk-adjusted return is a measure of how much return you earn for every unit of risk you take. The most common metrics include:
Sharpe Ratio: Excess return per unit of volatility (total risk)
Sortino Ratio: Excess return per unit of downside risk (only counts losses)
Maximum Drawdown: Largest historical peak-to-trough decline
Ulcer Index / Calmar Ratio: Other downside-focused metrics
These are critical tools for evaluating whether a strategy is efficient. Why?
Because two portfolios with the same return can carry vastly different risks. One may grind slowly upward with minimal turbulence; another may whip up and down and leave you exposed to large losses.
✅ Why Risk-Adjusted Metrics Matter More Than Return Alone
Let’s look at two strategies:
Traditional Portfolio:
Annual Return: 11%
Max Drawdown: -25%
Sharpe Ratio: 0.60
Sortino Ratio: 0.90
Risk-managed Strategy:
Annual Return: 9%
Max Drawdown: -10%
Sharpe Ratio: 1.30
Sortino Ratio: 1.60
Even if the absolute return is higher for traditional portfolio, the risk-managed strategy clearly offers better capital efficiency — achieving consistent returns with significantly less risk and drawdown.
This is the reason sophisticated investors are allocating capital not just across asset types — but across strategies with the highest risk-adjusted return.
🔁 Why Asset-Based Diversification Isn’t Always the Answer
Many investors falsely believe that adding bonds, dividend funds, or international equity reduces risk. But this only works if:
The added assets are uncorrelated, and
The combination leads to better overall risk-adjusted return
In practice, adding low-yield bonds or highly correlated global equity often waters down portfolio efficiency without reducing real risk meaningfully.
Instead, if one strategy (like Alamut Capital’s) provides better Sharpe/Sortino ratios, it may make sense to allocate more heavily to it — even if it's within a narrower asset class — because it offers:
✅ Smarter risk control
✅ Smoother compounding
✅ Protection during market stress
🧠 Key Insight: Strategy-Driven Allocation Beats Asset-Type Bucketing
"Smart concentration is often safer than dumb diversification."
Investing based on the quality of risk-adjusted returns — not the label on the asset class — is the more intelligent, evidence-based path forward.
Traditional diversification dilutes returns and risk together. Strategy-driven allocation selectively concentrates where the risk is better managed and the reward is more efficiently earned.
💡 How Alamut Capital Approaches This Differently
Our strategies are designed around the core principle of capital efficiency. That means:
We use systematic, quantitative models that actively adjust exposure based on risk signals
We aim to limit downside, not just chase upside
We strive for high Sharpe and Sortino ratios — even after our fees
We do not rely on static allocation between asset types, but on adaptive strategy allocation
As a result, our portfolios often offer better risk-adjusted performance than traditional index funds or balanced portfolios — which allows investors to allocate a greater share of their portfolio to our strategies with confidence.
⚖️ Example for a Client:
Let’s say a traditional advisor tells you:
“You should only allocate 60% to equities and 40% to bonds, because equities are risky.”
But what if we could show that our strategy:
Delivers equity-like or better returns and does so after fees
With half the volatility and drawdowns
Wouldn’t it make more sense to allocate 80–90% to that, and keep some liquidity for flexibility?
That’s not risky. That’s just smarter use of your capital.
📢 The Takeaway
Don’t ask:
“How should I split between stocks and bonds?”
Instead ask:
“Which strategies give me the best return per unit of risk — and how much should I allocate there?”
🚀 At Alamut Capital, we focus not just on returns — but on delivering those returns with precision, control, and efficiency.
Let us show you how risk-adjusted strategies can redefine your long-term success.
Contact us
It is never too early to get started on your investment plans and never too late to take control of your financial future.
invest@alamut.capital
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Alamut Capital Advisors Inc.
401 Bay Street, Suite 1600,
Toronto, ON, Canada, M5H 2Y4