As a new investor (I purchased stocks on February 28th) of course I've read the prevailing opinion is that diversification is a wise strategy. The whole 'don't put all your eggs in one basket' philosophy.
Yet even Warren Buffett said "Wide diversification is only required when investors do not understand what they are doing.” When he says that is he making a point that there is a loss of returns through over-diversification and simply not picking a few stocks that you believe strongly in?
As strongly as I believe in AGNC, it represents one of five stocks in my portfolio. It is beyond me to read the market pulse and see the guy whose strategy is 76% AGNC and think that's a good strategy.
I guess that since I've been reading Doc Reits and crew on here for a month this thread was a way to introduce myself and also send my appreciation for the outstanding topics that are discussed daily.
The problem with owning too many stocks is keeping track of them. Its hard to sell if you don't notice that you should have because you were distracted. More than 10 is probably too many. You can lower risk with ETFs.
See my reply in the thread here "DIVERSIFICATION MY ***". And, yes, Buffet is saying that when you diversify broadly (as one is supposed to do), the investor gives up some profit in order to reduce the risk of a BIG loss. It's like insurance: you pay a premium and get nothing in return (except some peace of mind and the ability to sleep well at night) UNLESS there is an covered loss.
I have saved your message for future reference, thank you for your advice. Luckily I placed all my money in Affymax which had a great week. It has a beautiful chart over the last month.
But seriously some stocks just don't hunt, which is why I have Oncy in my portfolio, man got agnc paying fun dividends and one stock which may double or go to zero. It sure is fun.
henrobrice: Here's a diversified portfolio of just 5 holdings --- no one said that an investor has to have 50 or 100 holdings for divdersification:
* FLPSX (Fidelity Low Priced Stock Mutual Fund --- one of the most consistent in beating the S&P 500 index, better than 90% of all mutual funds)
* KMM (a stock that actually is a bond fund, holding corporate bonds widely throughout the world but concentrating on the USA and Europe; current dividend yield is 8.3%)
* AGNC (enough said on this BB about it)
* VGR (tobacco & real estate leasing; current yield is 14.9%, including an annual 5% stock dividend in Sept.)
KMM and AGNC hold up very well in most down stock markets and don't usually follow the market trends. FLPSX has had an average annual ROI of 14.9% for the last 30 years. Very few individual stocks or mutual funds can sport that kind of average return over a 30 year period. In fact, FLPSX has had only 5 losing years in the last 30; it has had only ONE really bad year (2008), when it lost 36.4% then rebounded with more than a 60% gain the next two years (2009 & 2010).
You pick the % for each holding that makes you most comfortable --- 20% in each wouldn't be bad.
mmichaelr: you ever hear of selling some of your holdings to achieve desired income? It doesn't ALWAYS have to come from (cash) dividends. The type of asset you choose for diversification should be consistent with your objectives. Growth? Income? Mix of both?
Also, most brokerages will allow you to borrow against your holdings so that you don't hve to sell the assets to achieve income.
I very much disagree with your view about precious metals (for the average) investor. Owning anything that offers no income or earnings growth (therefore fair value cannot be determined) is risky business. The average retail investor is far too emotional and precious metals are plagued with emotional hype.
I have gold, numismatics and white metals in my safe. With an average cost for gold under under 400 and silver under 600, I built a nice postiion. But still no income stream. During the same time I have held those metals my Swiss Franc positions have handily outperformed. TIPS have not been with us through an accelerating inflation cycle. But TIIPS may offer the retail investor a more useful hedge, Especially since foreign currency denominated can also be purchased.
Well I read it and didn't know if it was a reply or not because it was a different thread. I am not purchasing 15 different stocks or mutual funds, because I don't feel I could keep up with that many. Fundamentally I am against anyone (the mutual fund managers) being able to skim off the top of my investment anyways so I bought 5 different stocks.
Used the Graham number as a way to find potentially undervalued stocks and then diversified into railroads, pharmaceuticals, oil drilling, and AGNC.
I have a couple years until retirement (I'm 25) so the investments probably lean on the risky side, at least two of them. It is more interesting that way.
diversification is not somthing to do simply for the sake of it or by ticker. you do it to avoid the big hit that will surely come some day. you do have to watch out, though. XOM and AAPL. two of the biggest companies in the world. could not be more different than any other two. however, if you own SPY, the exchange traded shares of the SP500 index, then you already own a bunch of both of those issues.
even buying a lot of different REIT tickers, being careful to get a lot of different types, is not necessarily diversified. they too, are in various indexes, and sometimes the tail can wag the dog.
You make a vaild point. XOM and AAPL would provide specific security and sector (diversification within an economic cycle) but not broad market (economic cycle diversification).
Investors need to construct correlation matrices and watch for trending correlation changes. Even the large capitalization Emerging Market (BRIC) ETFs have tend to favor export and commodity related businesses which provide little diversification from the broaqd market.