Do not get deep into debt, save money for a rainy day, buy life insurance, and do not try to day trade. There is one rule, however, that is considered the granddaddy of all investing maxims: Diversify your investment portfolio. What if all the people who say to diversify are actually wrong? The Birth of Investment Diversification The idea that you should not put all your eggs in one basket may be a common sense rule. But ironically, most investors prior to the s not only did not follow it, they were not even encouraged to do it. In the s into the s, the popularity of k plansIRA accountsand the types number of middle class Americans entering the stock market helped push the idea as a marketing concept to sell mutual funds. Main Street America could not afford the stock commissions of that era. No, mutual funds were the only way the average American could get in on the growth potential of the stock market. One-hundred dollars would not buy you many shares of IBM — not after commissions. It was a perfect selling tool: Therefore, in a downturn, you cannot get hurt as badly. This proved to be a sound sales pitch — and as many people who had money in the market during the dot-com bubble burst in and the end of can tell you, not true. Diversification, in theory, is perfect, but in reality there is a price to pay. Watered-Down Returns Imagine the perfect glass of iced tea: It has the right sweetness and a strategy hint of lemon. Now, imagine if you mixed the glass of tea with a gallon of water. Do you want to drink some now? That, in a nutshell, is a mutual fund. Mutual funds suffer from over-diversification. Regulations cap the money a mutual fund can invest in any one company: This means that any positive growth in the upside of types market will happen at a slow pace. There is not enough money in one stock, or even a few stocks, to fuel fast growth profits. That does not protect you, however, from the downside. As many banged-up retirement funds can showcase, the large diversification of the fund does not protect you from sharp declines in the market. A mutual fund that has 20 companies in their fund is still in the market. Large downturns in the stock market, such as the one the country experienced inaffect the whole market. Therefore, every single stock in the fund goes down, and the mutual fund goes down too. The rule of the market is that downturns happen more sharply than upswings. This means you get slow upside growth and rapid downside losses. The Richest People Are Not Diversified Bill Gates, Warren Buffettand Michael Dell: What these three famous entrepreneurs have in common is not just their billionaire status — it is that none of them are diversified or, at least, not greatly. Their extreme wealth is the result of holding stock, primarily in one company. It is true that they own the stock of companies they founded and ran, but they are a perfect illustration of diversification power of concentration. The quickest and the fastest way to wealth is when you own concentrated positions. When the market moves, you make the most money when you own diversification shares in one or a few positions, as there is more leverage with concentration. The flaw in this strategy is that when the market goes down, you will lose a lot more. However, there are strategies available to mitigate such losses — including having a portfolio that is truly diversified and not just invested in a range of stocks, and using financial derivatives like options to protect against market downturns. Effective Diversification Your mutual fund gives you the illusion of diversity. The only true ways to be diversified are to have money invested in different types of security classes, or types a lesser extent, different sectors. In other words, to be truly diversified, your investment needs to be spread out among stocks, bondsgoldcurrency, and commodities. If you are strategy doing that, then you are not diversified. Final Word Fear of loss is the main reason why most people accept the rule of diversification. No one wants to lose money, not even Warren Buffet. It is a cute line, but the rub is in how to do it. History has shown that diversification has not diversification many portfolios. In fact, the way it is practiced today makes it more likely, not less likely, that you will take a substantial strategy at some point. The truth is that you cannot avoid losses. You will take losses at times in your investments, whether they are diversified or not. The trick is in not losing too much, or too often, and doing that can be simple. Through the use of effective diversification — money invested in stocks and a little in something the opposite of stocks, like bonds, or using covered calls — you can lower the risk to your investment portfolio a great deal. What tips do you have for reducing your investment risk?
Module 5 Diversification related and unrelated mov
Module 5 Diversification related and unrelated mov
Lists compiled by Asimov appeared in his three Opus books ( Opus 100, Opus 200, Opus 300 ), and in his autobiographical volumes ( In Memory Yet Green, In Joy Still Felt, I.
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A. S. Peterson, president of the commercial State bank, when interviewed by a representative of the Dispatch this morning, said.
Lists compiled by Asimov appeared in his three Opus books ( Opus 100, Opus 200, Opus 300 ), and in his autobiographical volumes ( In Memory Yet Green, In Joy Still Felt, I.