Why Diversify Your Portfolio?

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stocktrader3429

It's great to get advise from financial planners, advisors etc. who tell you to diversify your portfolio so you don't get hit hard if/when a particular sector goes out of flavor, but really, how practical is that, esp. if you are managing your own money?

There's so much news and research to do to keep abreast on specific industries (let's say technology, media/entertainment, advertising etc.) that if you started diversifying beyond more than 3 or so industries, you'd spend all your time doing research instead of managing your portfolio. And even then you won't be able to keep up with your news and latest happenings.

All the success stories that you heard about (traders, investors, entrepreneurs, businesspeople etc.), they are successful because they are amazing at what they do. A media executive/investor isn't going to start focusing on energy all of a sudden and become a top executive in that industry. Could it happen? Yep, but why bother? Why not just continue to focus on those industries and be an expert?


What do you all think?
 
Quote from stocktrader3429:

It's great to get advise from financial planners, advisors etc. who tell you to diversify your portfolio so you don't get hit hard if/when a particular sector goes out of flavor, but really, how practical is that, esp. if you are managing your own money?

There's so much news and research to do to keep abreast on specific industries (let's say technology, media/entertainment, advertising etc.) that if you started diversifying beyond more than 3 or so industries, you'd spend all your time doing research instead of managing your portfolio. And even then you won't be able to keep up with your news and latest happenings.

All the success stories that you heard about (traders, investors, entrepreneurs, businesspeople etc.), they are successful because they are amazing at what they do. A media executive/investor isn't going to start focusing on energy all of a sudden and become a top executive in that industry. Could it happen? Yep, but why bother? Why not just continue to focus on those industries and be an expert?


What do you all think?
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Do you have a specific question? All but the last appeared to be rhetorical. It seems you have already formulated your opinion and wish for confirmation.
This also may be the wrong forum for discussion. This is the trading forum.
Again, what's your question?
 
Moderators can feel free to move the thread to its appropriate section.

My question is - does diversification make sense to you? If so, up to what extent?

And no, I don't think I'm confusing entrepreneurs and passive investors. Just like an entrepreneur who's an expert in technology can't go out and successfully start a manufacturing firm (without a steep learning a curve), similarly, a passive investor can't go out and invest in energy if he's experienced in technology (again, without a steep learning curve).

I'm just interested to hear your thoughts on portfolio diversification.

Thanks.
 
Quote from stocktrader3429:

Moderators can feel free to move the thread to its appropriate section.

My question is - does diversification make sense to you? If so, up to what extent?

And no, I don't think I'm confusing entrepreneurs and passive investors. Just like an entrepreneur who's an expert in technology can't go out and successfully start a manufacturing firm (without a steep learning a curve), similarly, a passive investor can't go out and invest in energy if he's experienced in technology (again, without a steep learning curve).

I'm just interested to hear your thoughts on portfolio diversification.

Thanks.
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I live in Houston and know personally more than a dozen people who "knew everything about the oil industry," worked for Enron, and lost every dime of their multi-million dollar wealth when that company went down. They went from living like kings to starting from scratch. And these weren't the bigwigs responsible for the mess, they knew nothing about it, as did 99.99% of the investing population. Diversifying would've saved them nearly completely.
 
I agree. I'm not necessarily talking about these instances. In hindsight, we could've all avoided Enron and we could all invest in the Googles of the world without diversification and get rich.

In Enron's case, as you pointed out, these people were experts in their fields, but obviously they couldn't do anything about it, since they (along with millions of others) had no idea what was going on.

Also, I'm not against diversification 100%. I'm only saying that it might be worth it to stick to 3 or so industries at a time where you are the "expert" and have gotten so good to draw out indirect relations between product launches, technologies or whatever's critical to the success of that industry and the companies inside it.

If you are deeply involved in a few industries, you should be able to see trends and can benefit from even the smallest of opportunities.
 
Go look up the investment strategies of the big university endowments. Yale, Harvard etc. See how they diversify, see how it affected their performance in 2001, 2002.

E.g. for Yale, goto http://www.yale.edu/investments/ (In the 2006 report, check pages 8 and 9 on the pros/cons of diversification)
 
It's great to get advise from financial planners, advisors etc. who tell you to diversify your portfolio so you don't get hit hard if/when a particular sector goes out of flavor
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Prescription for mediocrity.

If you become an expert in one sector, what will you do while that sector is out of favor? Much like an analyst no one wants to listen too because it's not hot.

Imo, it wouldn't be a bad idea to concentrate on catalysts, such as becoming an expert in bankruptcies or Ipo's. Although at first glance it would look like you would need to know the industries of the ipo or bk but you could study how they trade in the market as opposed to how they will fare in business. Ie. Lampert or asbestos.

Really though, my opinion is that one needs to go for the fat pitch, diversification is a strategy to maintain or preserve wealth.
 
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My question is - does diversification make sense to you? If so, up to what extent? Thanks.
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Yes, it is important to be divesified to avoid stock specific risk!

You can do that very easily with the SPY ETF, or the Vanguard Total Market Index. :)
 
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