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Cambridge Weekly Update – 1st July 2019

Published

1st July 2019

Categories

Economy, General News

The tortoise cracks the egg – what’s real diversification?

‘Don’t put all your eggs in one basket’ is a phrase we hear time and time again. Although useful in explaining the concept to clients, it’s not really helpful in explaining why we seek to diversify and how it works in practice. As such, most of us know we shouldn’t just hold one stock, or even one index, as its too risky.

Investment is always uncertain, and we buy multiple assets in order to ‘diversify’ or spread the risk on the basis that risk events don’t always coincide across all assets at the same time. However, what if this is done naively and the asset we buy to diversify isn’t actually all that different from the other assets we already own?

 

Weaponising the US dollar – unintended consequences

Controlling a state’s ability to trade has been used for centuries in international disputes. As the world economy has grown blockading a neighbouring state has moved on to sophisticated targeted sanctions on sections of a nation’s economy or its leaders. For example, this week President Trump enacted sanctions that prevent Iran’s top officials from accessing financial instruments and in particular US dollar assets – once again weaponising the dollar.

The US can use its currency as political weapon by exploiting its status as the global reserve currency. Iranian power brokers do not hoard the Iranian rial, they hoard the US dollar.

 

Read the full commentary here