Diversification

[cif5000]

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

Good!!! Actually, everything works...

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

[winston]

by Aspellian » Sun Feb 14, 2010 10:27 am

la papillion wrote:
3. Diversify. I diversified until I've 20 companies in my holdings without a clue what they are doing. My capital is spread so thinly that even if any of them is a 3 bagger, I don't think I'll make much difference to my portfolio.

Haha, just sharing some thoughts.


Thanks for the sharing.

For me, I usually hold only 3-5 stocks during an uptrend. and will go back to cash when market in correction. cos its difficult to follow each company very closely if one has >10to 15 stocks (in my opinion).

[ghchua]

by Aspellian » Sun Feb 14, 2010 10:27 am

la papillion wrote:
3. Diversify. I diversified until I've 20 companies in my holdings without a clue what they are doing. My capital is spread so thinly that even if any of them is a 3 bagger, I don't think I'll make much difference to my portfolio.

Haha, just sharing some thoughts.


Thanks for the sharing.

For me, I usually hold only 3-5 stocks during an uptrend. and will go back to cash when market in correction. cos its difficult to follow each company very closely if one has >10to 15 stocks (in my opinion).

There is no need to follow your companies closely if one adopts the diversification strategy. The key is to stay invested and let the market decide. You only need to read up a bit when you want to buy to decide which stock to add or include new ones. Otherwise, you need not do anything - Just Buy and Hold.

It makes a difference because by using the Buy and Hold strategy, good companies will become better if you hold them for long term. They might not only be 3 bagger, they can be 5, 10, 20 or even 50 baggers! Yes, you had heard me correct. And it makes a difference. The dividend received and compounded throughout the years by re-investing back into the market.

[kennynah]

There is no need to follow your companies closely if one adopts the diversification strategy. The key is to stay invested and let the market decide. You only need to read up a bit when you want to buy to decide which stock to add or include new ones. Otherwise, you need not do anything - Just Buy and Hold.

i cannot agree with this BUY and HOLD approach.... it is not as rewarding as books will make them out to be...

simply refer to investments made in Jan2000...if someone had adopted such diversification method and BUY and HOLD...10 years later, today, all the investments would still be underwater by more than 50% in the case of Nasdaq stocks...no amount of dividends in the last 10 years could possibly recoup the losses in asset value. more over, dividend payouts are not mandatory, not an obligation... in very bad years, companies have known to retract all dividend payouts. buying an equity and using anticipated dividend payout as a cushion to price deterioration is not a wise move.

in investment and trading alike, no one should take a passive approach; ie. BUY an asset and simply hope they will do well or assume that by diversifying into an array of equities, that overall risks is defrayed... in fact, i might add that when we assume more positions, our overall risks increase...not decrease... thus, even long term investors must at times review the price and decide if that position should be exited for loss or profits.

[Musicwhiz]

Hi Kennynah,

I think one cannot simply use a timeframe reference like 2000 for example when stocks were massively over-valued, to assume returns would be flat or negative for BUY and HOLD over the medium-term.

Astute value investors would purchase only when there is under-valuation and margin of safety, and their purchases will be staggered across different companies at different times as not all companies are under-valued at the same time (notwithstanding the fact that the Index may be making new lows).

But I disagree that one does not need to follow closely with one's companies. For myself, I closely follow the developments and industry characteristics of the 7 companies I own. Hence, I cannot own too many as it would be severely onerous to keep track.

Just my 2-cents worth.

[ghchua]

i cannot agree with this BUY and HOLD approach.... it is not as rewarding as books will make them out to be...

simply refer to investments made in Jan2000...if someone had adopted such diversification method and BUY and HOLD...10 years later, today, all the investments would still be underwater by more than 50% in the case of Nasdaq stocks...no amount of dividends in the last 10 years could possibly recoup the losses in asset value. more over, dividend payouts are not mandatory, not an obligation... in very bad years, companies have known to retract all dividend payouts. buying an equity and using anticipated dividend payout as a cushion to price deterioration is not a wise move.

in investment and trading alike, no one should take a passive approach; ie. BUY an asset and simply hope they will do well or assume that by diversifying into an array of equities, that overall risks is defrayed... in fact, i might add that when we assume more positions, our overall risks increase...not decrease... thus, even long term investors must at times review the price and decide if that position should be exited for loss or profits.

Buy and Hold is not buy once in Jan 2000 and forget. It is consistently buying into a diversified portfolio of stocks every month with spare cash and re-investing dividend back into the market. And Nasdaq stocks is not a diversified portfolio because it is a technology heavy index.

Buying an array of equities does decrease your overall risk exposure to one company. It diversify away non-systematic risk like company specific problems. By holding long term, one is having a view that our life will be better than what it is now 10 years (or even more) later and therefore, companies will in a whole be doing well and their share price should reflect that. Because these companies are the ones giving us better products, services etc and that will result in better profits which will translate into higher share price in the long term as well. It is just a simple concept that we strive to make life better and therefore, the future is brighter than what it is now.

For a long term investor, their sell decision should be based on investment objective, and not based on share price of a company in the portfolio. Which means, let's say I wanted to buy a house 5 years later and I need to pay for down payment. I allocate say, 20% of my portfolio for this investment objective. So, the drawdown of the portfolio should start around 5 years later. During that time, I will review my portfolio and then progressively sell-down that portion (i.e. 20%) of the portfolio. What to sell? Sell those overvalued stocks during that time and leave the remaining 80% of the portfolio invested for future investment objectives.

[ghchua]

But I disagree that one does not need to follow closely with one's companies. For myself, I closely follow the developments and industry characteristics of the 7 companies I own. Hence, I cannot own too many as it would be severely onerous to keep track.

There is no need to follow closely if one holds a large diversified portfolio of stocks. One is effectively buying the market, and therefore the result is market return. I have a diversified portfolio of stocks and I do a bit more adjustment by overweighting my better stock ideas. But still, the bulk of my portfolio is diversified across many stocks.

[Musicwhiz]

There is no need to follow closely f one holds a large diversified portfolio of stocks. One is effectively buying the market, and therefore the result is market return. I have a diversified portfolio of stocks and I do a bit more adjustment by overweighting my better stock ideas. But still, the bulk of my portfolio is diversified across many stocks.

Hehe ok thanks for clarifying. I guess our methods are slightly different. You hold a broadly diversified portfolio. I choose to just focus on 7-8 companies.

[kennynah]

By holding long term, one is having a view that our life will be better than what it is now 10 years (or even more) later and therefore, companies will in a whole be doing well and their share price should reflect that. Because these companies are the ones giving us better products, services etc and that will result in better profits which will translate into higher share price in the long term as well. It is just a simple concept that we strive to make life better and therefore, the future is brighter than what it is now.

i like this optimism.... nice and i wish you are correct on this point...

[winston]

Ackman: Investors Who Diversify Are Just Plain Lazy By: Julie Crawshaw

Pershing Square hedge fund manager William Ackman says that investment managers who focus on keeping their portfolios diversified aren't smart, they're just plain lazy.

"I think most investors overdiversify because they're lazy," Ackman said during a recent speech at the Active/Passive Investor Conference.

"Diversification covers up ignorance."

Many large investors like Ackman haven't done enough research into the companies in which they invest, Ackman claims.

“If they've got 200 positions, do you think they know what's going on at any one of those companies at this moment?” he asks. "As a result of overdiversification, their returns get watered down."

Most individual investors don’t have the expertise – or time – to build a diversified investment portfolio with the proper asset mix, notes financial writer Jason Alderman.

“That’s why most 401(k) plans and brokerages like Schwab and Fidelity offer portfolios with varying risk profiles, from extremely conservative … to very aggressive,” Alderman writes in the East Texas Review.

“Typically, each portfolio is comprised of various investments that combined reach the appropriate risk level.”

“One challenge with asset allocation is determining your appetite for risk,” Alderman points out.

“Would you lose sleep investing in a fund that might potentially lose money, or are you willing to risk temporary losses for the possibility your account may grow faster?”

“The riskier the investment, the greater its potential for financial reward over the long haul.”

http://moneynews.com/StreetTalk/Ackman- ... /id/352330