Diversification Can Kill Portfolio Performance!
Used well, diversification reduces portfolio risk. This post begins the White Top View Series, Smart Diversification that outlines how smart investors use smart diversification.
Diversifying well to cut risk requires knowing how to make diversification choices and selections. The best diversification choices reduce risk without sacrificing portfolio performance. Too much diversification can make sure a portfolio underperforms the market without providing greater risk reduction.
Too often financial advisors or investors can make poor investment choices in the name of diversification. Poor execution of a diversification strategy can definitely harm portfolio performance.
Always Remember Rule One
Recall Warren Buffett’s rule one, “Don’t lose money!” Too many financial advisors and investors misuse diversification in the name of risk reduction. They can seek to cut risk and not lose money. However, mindless one size fits all diversification decisions can make sure portfolio performance is mediocre to poor!
Fund companies offer aggressively promoted balanced funds as the safe, diversified approach, for any and all. Such funds get sold as the answer for mature professionals at the top of their game and earning power. The same fund and approach is also offered to stay at home Moms and housekeepers, aspiring athletes, recent graduates and elderly retirees too! One diversification approach for all! That gives no consideration of the different circumstances for each person.
Amazingly, funds offered as the diversification answer get offered as the answer for you too! Wow! One size fits all! With no consideration of how you earn your living, where you live or your stage of life, investors get offered the same fund.
Easy, Fund Based Diversification can mean high costs for you!
Large funds, promoted as an easy way to diversify, are indeed diversified. Diversified to the point that such funds or your portfolio managed in the same way, can not possibly outperform the market!
Once investors pay all costs, the net performance consistently underperform the market! Many funds carry 70 or more positions. The large number of positions held, ensures diversification at the cost of limited portfolio performance!
That is not smart diversification.
More sage advice from Warren Buffett, “Wide diversification is only required when investors do not understand what they are doing.”. How, where and what we use to diversify and control risk, requires us have a smart process.
Learn and use smart diversification. Smart diversification helps smart investors become superior investors. You can outperform the market while being safely diversified. Smart diversification means considering the specific situation of each investor. Then tailoring diversification to fit that personal situation.
We want good investments and good performance without overexposure to any one sector or risk. We want good upside and control of our downside.
Smart diversification is a key to taking control of your financial future. Diversification is one tool that you can use to help control your financial future.
Diversification hedges, or partly insures, that you have more control of financial and economic risks in your life. Done well, it minimizes the impact of bad news or the downturn of one investment on your economic life. It attempts to position your investments, so a setback in one investment, does not financially devastate you.
Smart Diversification Process
Superior investors use smart diversification as a process to reach the best strategy for them. Much of it is an exercise in personal awareness. With that awareness in place, you can go ahead and confidently diversify well.
The Smart Diversification Process:
First: Look At Your Big Picture
Second: Consider Investment Types
Third: Geographical Factors
Four: Sector Selection
Share the knowledge!
Please share this blog with your family and friends. Subscribe free and get all new White Top View blog posts in your inbox!
New readers start with the White Top Investor website layout and organization explained: Click here to go to the Start Here Page.
Your comments and questions are welcome here. Or email me at WhiteTop@WhiteTopInvestor.com. Bite-sized White Top View posts are lessons to help non-investors on the way to becoming knowledgeable, comfortable, confident investors. By demystifying investing and giving you a better understanding of markets, one small step at a time, you can become the master of your financial security and independence. The White Top Views email list will never be shared or sold.
Have a prosperous day!
These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com.
Image courtesy FreeDigitalPhotos.net
Links to the White Top View Series, Smart Diversification