What is the one thing nearly every investment advisor, financial planner, or grandpa would tell you is the most important attribute of a solid portfolio?

They would all probably tell you the one most important thing is to diversify. Don’t put all of your eggs in one basket, right?

It makes perfect sense to any rational person and is almost a religion among some in the financial planning community.

Planners use fancy-schmancy software to “optimize” asset allocation and will plot your portfolio vs. “the efficient frontier” in order to fine tune your risk and potential reward.

Since nobody knows where the next hot market will be, wise folks tell you it is necessary to spread it around. The mantra is you should put some in U.S. stocks, some in European and Asian stocks, emerging market equities, gold, industrial commodities, bonds, t-bills, foreign currencies, etc.

Nowadays the well-heeled are even diving into private equity funds and hedge funds.

The whole theory is that all of these various markets aren’t correlated so one will zig while the other zags. Not only that, but markets have different rates at which they gyrate; some, such as Chinese stocks, zoom around like bottle rockets, while others plod along like oxen.

This gyration rate, or volatility, is called beta.

The net effect of the gyrating zigs and zags is that a well constructed portfolio will, in theory, give you smoother, sleep at night, “efficient” returns.

But in the real world, U.S. stocks, European and Asian stocks, emerging market equities, gold, industrial commodities, bonds, t-bills, and major foreign currencies are becoming ever more correlated.

They are all zigging together.

Look at a five year chart of any of the above indices and every one of them looks almost the same.

In five years U.S. stocks are up 80 percent, the EAFE (Europe, Australia, Far East) index has gained 100 percent, emerging markets are up 200 percent, gold is plus 100 percent, raw materials are up 150 percent, oil plus 100 percent, and the Euro is 70 percent higher.

There isn’t a zag among them!

Since correlation is increasing, diversification is not reducing your risk as much as you may think.

Warren Buffett had a good take on risk during the Q&A at his last shareholder meeting.

“Volatility does not measure risk,” he said. “It’s nice math but it is wrong. Risk is not knowing what you are doing. If you know what you’re dealing with, and know the price you should pay, then you are not dealing with a lot of risk.”

“We have invested in a lot of sectors that have high betas,” Buffett added. “Since stock prices jiggle around, finance professors have translated that into investment theories. The development of beta has been useful to people who want careers in teaching.”

Are you diversified to reduce risk? Oops, wrong question. Do you know what you are doing, know what you are dealing with and know the price you should pay?

If you answered no, then diversification may not be enough to give you a good night’s sleep.

David Sheaff Gilreath is co-owner of Sheaff Brock Investment Advisors, LLC, a money management firm specializing in separate account management. Views expressed are his own. He can be reached at 866-575-5700 or daveg@sheaffbrock.com.