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Diversifying one's portfolio is the best way to mitigate risks while retaining high potential returns. Akin to the old saying “Don’t put all of your eggs in one basket”, diversification involves spreading out investments across various asset classes, industries, geographic areas, and any other factors an investor considers relevant. Renowned investors such as Ray Dalio from Bridgewater Associates argue that diversification is crucial, asserting that a properly diversified portfolio has the potential to outperform those that lack diversification while derisking a portfolio by 70% to 80%.

Efficient diversification relies on minimizing the correlation of returns for the assets in your portfolio. When this is achieved, portfolios may enjoy a return-to-risk ratio that is five times greater than that of inadequately diversified or undiversified portfolios. This ratio is called the “Sharpe-Ratio” in Investment Linguo, and acts as the target factor to be optimized in portfolio optimization frameworks. 

As shown by studies from Tilburg University, traditional assets like shares and corporate or government bonds can thereby be supplemented by alternative assets, namely Real Estate, Commodities, Cryptocurrencies, and Collectibles, such as luxury watches. Numerous researchers have demonstrated a weak correlation between collectibles and other financial assets, noting a similarly modest correlation among various types of collectibles. Studies researching the investment performance of fine violins, observed a negative correlation between the researched objects and the S&P 500. Wine prices and stock market returns showed only a slight covariance, while a low equity betas for investments in collectible stamps was noted.

Luxury watches also showed differing performance in comparison with traditional assets, affirming that investments in luxury watches have a notable capacity to effectively diversify investors' portfolios. Watches exhibited a negative correlation with equities and other categories of emotionally-driven collectible assets, while showing better performance than other popular collectibles like art and wine. Studies by Tilburg University indicated that luxury watches showed a higher sharpe ratio paired with lower volatility, while incurring lower holding costs compared to cars and requiring no storage under controlled humidity, temperature and light exposure like wine. The liquidity of luxury watches also greatly exceeds those of other alternative assets, with the recent blossom of online secondary marketplaces like Chrono24 matching demand more closely with supply. 


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