Diversification

[winston]

Being Diversified Can Hurt You - If the market is heading down then being diversified means you are increasing your chances of losing money.

Think about it, if the majority of stocks are moving down then a diversified portfolio means that you are more likely to own stocks that are going down.

Instead, you want to be trading individual stocks or profiting from the hot sector. By being specific and particular, you are navigating through a downward spiral and really taking strong measures to dramatically increase your chance of success.


Source: Adam Mesh

[ghchua]

Being Diversified Can Hurt You - If the market is heading down then being diversified means you are increasing your chances of losing money.

Think about it, if the majority of stocks are moving down then a diversified portfolio means that you are more likely to own stocks that are going down.

Diversification reduces non-systematic risks like company failures. Share price going down when the market is on a whole down might be due to systematic risk, which cannot be reduced via diversification. Diversification gives one confidence to stay invested even during market downturn, as long as one's capital is not all wiped out due to company specific problems.

For a buy and hold investor, share price movement is not the main risk. The main risk is company specific failures. This can be reduced via diversification.

Instead, you want to be trading individual stocks or profiting from the hot sector. By being specific and particular, you are navigating through a downward spiral and really taking strong measures to dramatically increase your chance of success.

There is a tradeoff between trading stocks and holding a diversified portfolio of stocks. The latter allows one to stay invested, while concentrating on their other aspects of life like their work, family etc. Trading stocks might not necessary increase one's chance of success. It really depends on individuals and whether they want to devote time to monitor the markets and generate trading ideas. It is not easy for most people to be holding a job and trading part-time based on market movements. It is best to adopt a strategy that one is comfortable, and I have chosen diversification over trading.

[iam802]

There is a tradeoff between trading stocks and holding a diversified portfolio of stocks. The latter allows one to stay invested, while concentrating on their other aspects of life like their work, family etc. Trading stocks might not necessary increase one's chance of success. It really depends on individuals and whether they want to devote time to monitor the markets and generate trading ideas. It is not easy for most people to be holding a job and trading part-time based on market movements. It is best to adopt a strategy that one is comfortable, and I have chosen diversification over trading.

I think that is the key.

Choose a strategy or system that suits your needs. And this is why different investors or traders will do things differently.

It is what makes us different. The risk appetite, the timeframe we are interested in, mindset, etc. So, even looking at the same chart (for chartist like myself), there will always be different ways to trade (and/or invest).

[kennynah]

Choose a strategy or system that suits your needs. And this is why different investors or traders will do things differently.

i totally concur with 802...

if i was a single man...i would choose to date a few women... understand them and then decide whom i wish to spend more time with... reassess those selected ones.... and if one of them finally make the cut... then marriage comes to mind...

otherwise, back to drawing board....date a few girls....and repeat the process...

diversification is done simply becos, we cannot predict the future with any accuracy....and mitigating portfolio risks

[winston]

Diversification should be used with other Risk Management tools eg. Asset Allocation, Industry Risks, Currency Risks, Country Risk, Position Sizing etc.

As mentioned, I had a friend who had the bluest of blue portfolio. His shares were listed on a few continents.

When the financial crisis came, his diversification strategy did not save him as he did not get his Asset Allocation correct in the first place.

[kennynah]

that's why...dont just date girls from one country.... have a few japanese, koreans, chinese, thais, malaysians, pilipinas, indonesians, maybe turkish, ...spread out the risks mah....

[Rontan]

Choose a strategy or system that suits your needs. And this is why different investors or traders will do things differently.

if i was a single man...i would choose to date a few women... understand them and then decide whom i wish to spend more time with... reassess those selected ones.... and if one of them finally make the cut... then marriage comes to mind...

otherwise, back to drawing board....date a few girls....and repeat the process...

that basically sum up the gist of diversification. However, using your analogy, if one date a few women concurrently, it is unlikely that the person will spend enough time with the girls individual and develop a deep enough understanding of each other and to bring the subject of marriage into consideration. Selecting stocks for diversification purpose also requires considerable time spent to understand the business before commiting money into it. And the more time spent in understanding the business, the higher the chance of success.

[ghchua]

that basically sum up the gist of diversification. However, using your analogy, if one date a few women concurrently, it is unlikely that the person will spend enough time with the girls individual and develop a deep enough understanding of each other and to bring the subject of marriage into consideration. Selecting stocks for diversification purpose also requires considerable time spent to understand the business before commiting money into it. And the more time spent in understanding the business, the higher the chance of success.

Time is spent on understanding the business but having a diversified portfolio doesn't allows one the need to have a deep understanding of each business in the portfolio. Having a focused portfolio needs it though.

Diversification allows one to make mistakes. It is ok to have a few lousy business in your diversified portfolio. After all, you are not selecting the best of the best. But rather, you are buying a portfolio of stocks with selective overweight in confident ones. After buying my stocks, I will let the market decide what it wants to price my stocks. I am not selling anyway and holding onto my diversified portfolio tightly. I only re-visit valuations when I decide which stock to buy next.

I am not bothered about short term market movements, be it correction or rally.

[millionairemind]

Diversification Works... Until It doesn't!!!

[winston]

Now that you have brought this subject up, I think I can only handle at most 5 good ideas at a time...