here are some things that we can all agree on. Books more fun to read in paper form. Dorian must be the kelp. Also diversification is a good thing. It is an investment principle that we all know we should be following. Who doesn’t want to take less risk and to enhance investment returns and at the same time? (….Was.The free lunch?)But we also need to understand what diversification is:
# 1 you can’t diversify your way out of financial storm
Having a diversified portfolio will protect you from short-term market volatility – you’ll still have the big down days or even consecutive months of losses. It does not prevent bear markets and can not protect you against market reactions to Trump’s latest tweet. Diversification may or may not help in the short term, but it’s really a strategic long-term investor that will help you facilitate returns over market cycles.
# 2 Bigger is not always better
Having a portfolio with more ingredients does not mean that it is more versatile. This may be true if all asset returns are uncorrelated (i.e., prices do not rise and fall together), but this is unlikely to hold true. Also the links change constantly, until the asset is threaded in the past may be in the future.
Each asset you hold is less important than how it interacts with other (known as covariance) to reduce the portfolio overall risk. The marginal benefit from the addition of other investment decreasespast a certain point . That means adding 20 Fund to your portfolio you will probably not glory improve risk-adjusted returns, your counselor may be just building a very complex portfolio to justify the existence of his high fees.
# 3 diversification is not exciting
In fact, it’s too boring to talk about the portfolio gives you a globally diverse exposure to the world. You’re not going to hit any home runs as Amazon, but you’re also less likely to strike with your life savings in Lehman Brothers. You can leave the excitement to the other parts of your life – to be able to live the life you want after retirement is exciting, but the road to growing your retirement nest egg to get there doesn’t need to be.
Diversification is a strategy that plays out over a long period of time, and give you a greater chance to achieve your goals without having to predict how the future will turn out. As Howard Marks said:
“You must be diversified enough to survive bad times or bad luck so that skill and good process can have the opportunity to repay the long-term.”