Diversification

[TabJockey]

I dont do it. I could spread out in 6-8 holdings, but I dont, always 2-3, what I like best. Am I an idiot because everything I learn in uni points to diversification of risk?

 

[Wysiwyg]

Fixed percent risk money management/position sizing can be the same with 1 or 20 stocks.

 

[TabJockey]

Its quite hard though if you have two stocks that are quite volatile though? You would need to set a percentage of 20% or something which sounds crazy.

 

[Wysiwyg]

Your position size is determined by the stop loss location. If you place your stop outside the volatility range then you will accept smaller position size.

 

[tech/a]

I dont do it. I could spread out in 6-8 holdings, but I dont, always 2-3, what I like best. Am I an idiot because everything I learn in uni points to diversification of risk?

I think you ( personally) don't diversify through necessity rather than through design.

The argument for diversification is both to spread risk and also opportunity---a valid argument.

Personally I have found filling the basket to overflow when its going forward and removing it when it flattens out to be the best method.
There was a 7 yr opportunity with Property I /and others hit it hard.
Some hit Gold and the AU$
Other long and short Oil.

Frankly if you see opportunity I say exploit IT all you can with all you can afford.
Using Risk mitigation strategies as well.

 

[Julia]

It's a contentious issue. I don't diversify for the sake of it. As long as there are solid risk strategies in place, I'm prepared to put a lot more into something that's running strongly.

Have never seen the point in having good money sitting in stocks that are going nowhere, or even going backward, just for the sake of having a diversified p/f.

 

[KurwaJegoMac]

It's a contentious issue. I don't diversify for the sake of it. As long as there are solid risk strategies in place, I'm prepared to put a lot more into something that's running strongly.

Have never seen the point in having good money sitting in stocks that are going nowhere, or even going backward, just for the sake of having a diversified p/f.

I'm very much the same, I don't diversify for the sake of diversification - but that's not to say it's not a viable strategy in certain circumstances. I've always liked the following quote:

Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and then watches that basket closely.
Andrew Carnegie

 

[tothemax6]

I'm very much the same, I don't diversify for the sake of diversification - but that's not to say it's not a viable strategy in certain circumstances. I've always liked the following quote:
Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and then watches that basket closely.
Andrew Carnegie

Unfortunately, as wise as that man is, he can't see everything that is happening that will affect the basket in the future. He may find that a huge gust of wind might hit his particular basket, a gust he could not foresee, and then he would be wishing he had more baskets.
I do not deliberately diversify either, but as a result of not wishing to risk too much on any given position, my funds have happened to be in many different places (so I suppose I am 'incidentally' diversified). Unless you are like Soros, and you KNOW that the pound is overvalued, there is no good reason not be diversified. I.e. you rarely have information or insight that is heavily skewed towards one position.
Cheers

 

[tech/a]

Unfortunately, as wise as that man is, he can't see everything that is happening that will affect the basket in the future. He may find that a huge gust of wind might hit his particular basket, a gust he could not foresee, and then he would be wishing he had more baskets.
I do not deliberately diversify either, but as a result of not wishing to risk too much on any given position, my funds have happened to be in many different places (so I suppose I am 'incidentally' diversified). Unless you are like Soros, and you KNOW that the pound is overvalued, there is no good reason not be diversified. I.e. you rarely have information or insight that is heavily skewed towards one position.
Cheers

I disagree.
Being as wise as he is he will realise that the in balance now will eventually return to a balance once again and more than likely over compensate.
While being widley diversified mitigates risk it minimises if not kills life changing reward.

you rarely have information or insight that is heavily skewed towards one position.

I would alter this to
You rarely and in some conservative peoples case---NEVER--- take advantage with sufficient capital of opportunity even when its plainly in your face!

 

[So_Cynical]

I have very deliberately diversified my portfolio and plan on having no more than 20% exposure to any one of my favoured sectors, however i do look at diversification alot more holisticly than most (i think) because i look to also diversify geographically and by sub sector, risk and currency.

However im of the opinion that targeted diversification is what best suits my investment ambitions...there are sectors i want to be loaded up on (20%) and others im happy to just have only 1 stock, so limited to under 5% of total portfolio value.

 

[Tysonboss1]

It depends on the knowledge and skill set you bring to the table.

Some one with a passive investment style that seeks freedom from bother and is happy with a satisfactory return will want extreme diversification, probably an index fund along with a property and cash investments.

Some one who has a higher level of sophistication will seek less diversification in an attempt to achieve higher returns than the market as a whole. exposure to 6 companies would probably be the minimum recommended. with no more than 50% in one company.

 

[robusta]

The argument for diversification is both to spread risk and also opportunity---a valid argument..

Diversification can reduce opportunity, if you own too many shares all moving in different directions.

Frankly if you see opportunity I say exploit IT all you can with all you can afford.
Using Risk mitigation strategies as well.

I can not argue with this.

Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and then watches that basket closely.
Andrew Carnegie

This is how most of the great fortunes are made.

Unfortunately, as wise as that man is, he can't see everything that is happening that will affect the basket in the future. He may find that a huge gust of wind might hit his particular basket, a gust he could not foresee, and then he would be wishing he had more baskets.
I do not deliberately diversify either, but as a result of not wishing to risk too much on any given position, my funds have happened to be in many different places (so I suppose I am 'incidentally' diversified). Unless you are like Soros, and you KNOW that the pound is overvalued, there is no good reason not be diversified. I.e. you rarely have information or insight that is heavily skewed towards one position.
Cheers

Sometimes a incredible bargain is just too good to pass up, you do not know when it will pay off but you know sooner or later it will pay.

I guess I don't qualify as a wise man as the largest position I have held was 65% of my portfolio. I invested 50% of my capital and when the sp increased to make this holding 65% I took some profits early.

 

[Tysonboss1]

This is how most of the great fortunes are made.

And alot of fortunes lost,

 

[Liar's Poker]

People who lost fortunes diversifying, are probably the ones who think diversification is simply achieved by investing in multiple stocks.

Diversification means nothing if all your investments are positively correlated.

I had this arguement with Commsec when they brought in the increased leverage for diversified portfolio's option for margin loan accounts. Someone could go and buy 5 banks and claim a diversified portfolio, giving them 10% additional leverage. When really having just two stocks with correct portfolio weights like Brambles (BXB) + Metcash (MTS) would offer far better protection (not perfect example).

-Liar-

 

[tech/a]

Diversification means nothing if all your investments are positively correlated.

Yeh like the Stock market!!

What about other investment types?

 

[Liar's Poker]

Yeh like the Stock market!!

What about other investment types?

Like I said, not perfect example.

I created an excel spread sheet that worked out the optimal weighting of each investment in a portfolio of Bonds, Property and Shares a couple of years ago (part of my Masters).

I'll dig it up and post it - from what I remember, it used real data.

-Liar-