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“Harry Markowitz won a Nobel Prize for the insight that diversification is the only free lunch in the investment business. However, if all investments are in tech, much of the benefit of diversification is lost since tech valuations are correlated. For early-stage companies, profits are in the distant future, and therefore valuations are sensitive to interest rates. Shifting sentiment plays a role, and frequently both market psychology and monetary policy are factors, creating boom/bust cycles such as the internet bubble of 1999â€�2000 and the more recent recalibration of tech in 2022. There is a frequently overlooked temporal dimension to diversification. Other things being equal, a fund that invests $100 million a year over ten years is less risky than a fund that invests $500 million a year over two years. The former fund will likely invest across market cycles, which should lead to a lower volatility of outcomes, even if both funds make an identical number of investments with a similar risk profile.”
― Alok Sama, The Money Trap: Lost Illusions Inside the Tech Bubble