Wednesday, January 31, 2007

Diversification

Everyone talks about diversification and ya it’s true you have to be diversified if you want to spread out your risks, limit your downside, protect your nest egg blah blah blah…. But what about being too diversified? Personally I don’t like the idea of being diversified just because you’re supposed to be. In my opinion if you’re going to blindly diversify your holdings across multiple sectors, currencies, countries etc… why bother buying stocks? Just buy a few index funds and get it over with. Why waste the time and commission fees buying individual stocks? If you diversify too much you’re going to basically mimic the index anyways. I’m not telling you that diversification is bad I’m just saying that personally I think you should buy what’s cheap and if that results in you becoming diversified over time so be it, but don’t buy a fully valued company just for the sake of diversification… in my opinion that’s just stupid (you can’t beat the market by mimicking it).

4 comments:

MM said...

why bother buying stocks? Just buy a few index funds and get it over with. Why waste the time and commission fees buying individual stocks?

After several years of investing, I'm beginning to think that might just be the best thing. Not that my individual stocks havent made money and frequently beat the market index, but you can lose a lot more - faster - in stocks than in index funds. I still hold stocks and probably always will, but they do tend to be large-caps with big dividends that I want to compound for decades. On those, I really care less about the capital appreciation as I do the actual yield on my original investments. I want growing yields and reinvested shares for another 15 years or more. (Almost) everything else: Index funds.

Middle Class Millionaire said...

I think you bring up some good points mm and I believe that for a lot of people buying a few index funds might be the best way to go. However, for those of us that have a finance background and love the “hunt for value” I believe that over time we will be able to beat the index as the value in the companies we chose becomes realized. I do agree with you on the fact that “you can lose a lot more - faster - in stocks than in index funds” and that’s why it’s so important to do your research before you buy. But if you see the process of reviewing stocks as “a waste of time” then I agree it would probably be best to simply buy some index funds and “get it over with”. However, what I believe is the most important thing an investor can do is create an investment plan/strategy and stick to it.

If you are interested in indexing strategies my favorite is the “Couch Potato” strategy. Here is a link to Canadian Business’s website where they describe the “Couch Potato” methods and portfolios.

http://www.canadianbusiness.com/my_money/investing/article.jsp;jsessionid=ALKAMOJEAKFO?content=20060405_152254_1452

Cheers,
MCM
http://middleclassmillionaire.blogspot.com

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QUALITY STOCKS UNDER 5 DOLLARS said...

Diversification is always a good idea.