Everyone has a plan until they get punched in the mouth

In 1987, Mike Tyson was preparing to defend his heavyweight title against Tyrell Biggs, whose team had devised a strategy built around his considerable height and reach advantage. They planned to keep Tyson at a distance, where Biggs could use his longer range to control the fight.

Tyson wasn’t too concerned. Asked about the strategy ahead of the fight, he responded with a line that would become a metaphor for how quickly even the best-laid plans can unravel when tested:

“Everybody has a plan until they get punched in the mouth.”

Any plan can appear robust when one’s assumptions are holding. The real test comes when the conditions change.

The new conditions: a challenge to diversification

Harry Markowitz’s key insight about diversification was that imperfectly correlated assets can complement each other, enabling investors to reduce risk for a given expected return, or maximise returns for a given level of risk.

For much of the past three decades, falling financing costs and strong cashflow growth pushed asset prices higher, while low correlations between many asset classes meant weakness in one could often be offset by strength in another. Broadly rising markets meant what you owned often mattered less than how much exposure you had: investors could be rewarded simply for being in the market.

But today, more than 90% of global investable assets have a meaningful correlation with the S&P 500. This includes bonds, international equities, REITs, private assets and much of the hedge fund universe. The underlying exposure is increasingly linked to the success or failure of AI, with major indices concentrated in a relatively small group of technology companies.

In this environment, genuine diversification becomes both harder to find and more important to own.

What you own matters again

While correlations across asset classes have risen, individual stocks are increasingly moving separately from one another. We saw this dispersion in June, when growth and technology stocks weakened while Financials, Health Care and Industrials recorded strong gains.

At the same time, the gap between single-stock and index volatility has widened considerably, creating a broader opportunity set for active managers.

This growing gap has implications for how investors approach equity markets: the environment that rewarded simply maximising exposure to rising markets may be giving way to one in which what you own matters more.

The challenge, then, is to distinguish between exposures that merely carry a different label and those that offer genuinely different sources of return.

The volatility risk premium can provide one such source. At the individual stock level, selling put options allows investors to capture the volatility risk premium while seeking to enter positions at lower effective prices, providing a source of return that is not wholly dependent on rising equity markets.

This is central to the Talaria strategy. By combining the volatility risk premium with the equity risk premium, alongside interest earned on cash, the strategy reduces its dependence on market direction while preserving access to the long-term return potential of liquid global equities.

A bottom-up, value approach further diversifies portfolio risk and return across individual stocks, sectors and regions, rather than relying predominantly on broad market exposure.

As the conditions that supported markets over the past three decades can no longer be taken for granted, asset selection, valuation and genuine diversification matter more.

Rolling with the punches

The whole point of diversification is to accept that things don’t always go as planned: the goal is to build resilience against the unexpected and adverse.

Biggs’ plan for taking on Tyson wasn’t a bad one. And it worked, for the first round, anyway. But Tyson began finding ways around it, and Biggs ended up fighting, and ultimately losing, a very different fight from the one he had planned.

The objective should be to have a plan that will survive the punch you didn’t see coming. For investors today, diversification is crucial, but increasingly difficult to achieve. It’s no longer enough to own different assets; what matters is whether they provide genuinely different sources of return.

Markets will always deliver punches. A resilient portfolio shouldn’t require knowing in advance when the next one will land.