Financial diversification before modern portfolio theory: UK financial advice documents in the late nineteenth and the beginning of the twentieth century

The paper offers textual evidence from a series of financial advice documents in the late nineteenth century and the early twentieth century of how UK investors perceived of and managed risk. In the world's largest financial centre of the time, UK investors were familiar with the concept of correlation and financial advisers’ suggestions were consistent with the recommendations of modern portfolio theory in relation to portfolio selection strategies. From the 1870s, there was an increased awareness of the benefits of financial diversification – primarily putting equal amounts into a number of different securities – with much of the emphasis being on geographical rather than sectoral diversification and some discussion of avoiding highly correlated investments. Investors in the past were not so naïve as mainstream financial discussions suggest today.