Diversification is supposed to reduce risk of investing; properly done, it is avaluable tool for asset allocation, which MUST include a cash contingent. Yes, there are (and will be) times when "all boats rise" and "all boats sink"; that why cash during the 'sink' times is King and needs to be a part of any portfolio. Diversity should be taken in the broadest sense, not just in the stock market. It should include things like precious metals, real estate (which could be AGNC or your own house), stocks (including mutual funds), bonds, and CASH. In times of great inflation, precious metals soar; but during stable times, those metals don't do as well and may even lose value.
One must also take into account the investing time-horizon. If you are approaching retirement (or are retired like me), your investing horizon is short-term. There are instances where I am fully invested ("all-in"), but I keep that short (just a few weeks or months at most), thus avoiding the cyclical ups and down of the stock market; the rest of the time, I am sitting in cash (especially during times of high interest rates that beat inflation) waiting for the next big opportunity. While that smacks of market timing, it IS possible to time the market with a high percentage win rate (see Ben Stine's book, "Yes You Can Time The Market"). But, you have to have the right tools to do that. I use my own proprietary (and patented) analysis method to track both the overall market and individual stocks, bonds and mutual funds. That gives me an edge on most individual investors and achieves parody with the big investors/funds that use massive computers and intelligent software to time the market.
Bottom line: diversification, properly used, CAN be helpful in stabilizing an investment portfolio, especially when it includes a significant amount of CASH. And, yes, you can time the market and profit --- that's what 'buy low, sell high' is supposed to do.
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.
Certainly have to agree with Doc on this one. Equally important to rules is tools --- you have to have the right tools to do the job properly ... within the rules. And then there's training/learning. Like life, investing is a learning experience. Sometimes you can "go to school" on the learning experiences of others (like Doc), but thee are times when you have to make your own mistakes to learn. It's a complex world out there that we struggle to understand; rule & tools & training/learning bring order to an otherwise unruly world.
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.
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.
Typical "Flash Crash" is recognizable by the steep decline in one or two trades, signaling that a large hedge fund or mutual fund unloaded 1+ million shares at market price. It is also characteristic of a Flash Crash that recovery from the "instant" price drop is nearly as fast, taking but a few minutes of trading to gain back 2/3 of the drop.
The price action that we are seeing today isn't the Flash Crash; rather it is many traders pulling out of AGNC to invest elsewhere, causing the price to drop nearly straight-line over a period of hours or even days.
Possibly some large investor sold 5.3M shares because they were fooled into thinking that the ACAS share buy-back was AGNC OR that AGNC might follow suit. Subsequently, the price did recover some of that drop.
KMP has always been a good stock to own, along with its sister stock KMR for IRA's. Richard Kinder has a strong reputation as a top CEO and business-savvy manager. Can't do much better than that.
Whatchoo talking 'bout , boy? Call options this quarter have made a mint. Go bash somewhere else.
Thanks for asking. Yes, I sold my house in VA last October (closed mid-December) and moved to NC to be close to family here. The new house took four months to build after they got the permit from the County. It's a one-level 2700 sq. ft. two-BR home on 1/4 acre in a suburban area that's developing. I just finished furnishing the massive patio with table & chairs and BBQ grill this weekend. The house has kept me jumping, with little time for the stock market. Just about everything went wrong, starting with the mortgage company that pulled the rug out from under me just 36 hours before closing (they said that I didn't qualify for the loan for which I had already been qualified). The rest of my problems was like watching a stack of dominos fall, one by one --- I could write a book and sell the rights to Hollywood, but they wouldn't believe it. Besides, in 1947, they made the movie "Mr. Blandings Builds His Dream House (Cary Grant & Myrna Loy); but my experience was MUCH worse. [I think AL is well, but I'm having difficulty finding certain doctors that will take my BCBS of NC insurance (one of the Dominos); two orthopaedic surgeons have turned me down after scheduling appointments. I'm headed to a third Ortho this afternoon.]
The worst is over now (I HOPE!), and I'm ready to get back in the game. I'm working on an AGNC model to determine the probability of gain for certain trades, with an eye on 70% (or better) probability of a gain. I just needed those last dates to complete the set and finalize my model. Thanks again, and good luck with GLAD 3.
I wonder if Hollywood will let me star in my own story? The Orthopaedic report is in: Neck has two herniated discs, limiting mobility, but not a candidate for surgery (yet); pain comes and goes for years at a time (3 episodes so far since 1994). Knee doesn't need surgery, either, but needs aquatic therapy (aerobics in water --- do they make you wear a Tutu for that?). Hand (right thumb, actually) has severe degenerative arthritis (cartilage gone); they've put my thumb in a removable plastic cast + anti-inflammatory Rx to see if that will ease the pain (especially at the computer with the mouse). If not, I will need arthroplasty surgery to rep-build the metacarpal joint, probably in 1-2 years if the cast provides some relief.
I'm planning on an open house here on May 5; you're invited --- you've already sent me a gift in AGNC Call options trading. Thank you VERY much!
As you know, mReits are SO dependent on waistlines going up, as it means the swimsuits will be getting tighter this summer.
Approaching $12/share, KMM is historically very pricey and ripe for a reversal. KMM has only been at this level (~$12, adjusted for dividends) just once in the past 25 years. Further, the trend of the price history is beginning to flatten out (indicating a top or at least a plateau). Better to take some CapGains here, expecting to buy back in at a lower price. In the meantime, those who need the dividend income could switch to AGNC, which pays $1.25 per share quarterly (15.6% annually; next dividend is in June) until KMM drops closer to $10 before buying back in.
Doc, it works for me with IE9 (I posted a comment there on Rules for SPO).
P.S. I'm back in on Jun$30 Call options last Friday at $1.00 ... looks like a bargain to me.
Part of the reason for Q1 loss was the rise in mortgage interest rates (with a corresponding decrease in mortgage securities values, which move opposite to interest rates). So far in Q2, mortgage interest rates are back down to the lowest levels in years. That means that mark-to-market securities values are up, recouping some of those (paper) losses.