Diversification Is For Amateurs

[Dawg52]

I amazed at the backlash from that comment. It was an opinion. Don't take it personal.

And the replies are opinions.

 

[tightasadrum]

Even non-amateurs who take higher risks than index funds can make the wrong bet. Shoot, life is a gamble. Higher risks SHOULD provide higher returns. However, how much of your time and energy are you willing to devote to the research? Nothing comes free.
And more importantly, how much of your assets can you afford to gamble with?

I know several people who invest in individual stocks and do quite well. But they love doing the research and are good at it. But they only commit assets that they could afford to lose because they might very well lose the bet even if the decision was a good one.

I bet on investment real estate years ago. It's worked out so far. Time will tell. My bets on individual stocks has not been as good. I've never taken the time to learn the necessary skill to do the fundamental analysis well. My late father refused to invest in equities. Too risky, he said. Yet he ran his own small business which in many ways was more risky. Pick your poison.

 

[W2R]

Pick your poison.

When I want to gamble, I go down to the casinos and put a $20 in the slot machines. That is all I am willing to lose. I sure wouldn't bet my retirement money in such a cavalier fashion. Personally I prefer index funds and Wellesley to individual stocks.

Now, if I was a pro and investing OTHER peoples' retirement money, I might invest differently. Maybe I'd quote Clint Eastwood on my business cards:

"Do you feel lucky today? Well, DO you, punk?"

 

[rogersteciak]

Is there such a thing as too much diversification? Such as the highly diversified non-correlated portfolios containing every asset under the sun. Are the risks so balanced out that the returns will be lower because of the lower risk?

If you look at how endowments invest (e.g., Harvard, Yale), they own a little bit of everything. But their time horizon is many many decades, which is longer than the time horizon of most individuals. They can afford to be patient for the "loser assets" to revert to the mean to make them money.

A good PBS program to watch for this kind of investment insight is Consuelo Mack WealthTrack - Home. I get the episodes downloaded automatically each week from iTunes and watch them on my PC (I don't watch television anymore). You can also watch them online as video on demand.

 

[hankster]

I've become a "bird in the hand" kinda guy in my old age. I did some risky individual stock trading in the 90s. Won a few, lost a few. Ended up down a couple of grand. I found that I don't have the stomach for it. I'll stay with my mix of Wellington and various low cost index funds and wear the amateur label proudly.

 

[haha]

I've become a "bird in the hand" kinda guy in my old age. I did some risky individual stock trading in the 90s. Won a few, lost a few. Ended up down a couple of grand. I found that I don't have the stomach for it. I'll stay with my mix of Wellington and various low cost index funds and wear the amateur label proudly.

There is nothing inherently risky about individual stock trading, or inherently safe about buying and holding index funds.
For the last few years I have taken realized CGs ~$100,000 each year. I have already booked that again this year. That doesn't necessarily mean that the gains were all generated during the calendar year. But overall, it seems to be the gift that keeps on giving.

I sometimes get envious of the very low taxes that some of you are paying. Still, realized gains though taxed are nailed down. Then I re-deploy much of the cash into other opportunities that appear to be early in their gestation.

I like to plant the field, then cut it and get it into the barn. A lot can happen to a crop standing in the field. I take comfort from knowing that given that I buy my groceries with cash, I have a cycle of investment operations that cycles regularly through cash.

At the same time, I beleive strongly in diversification. I have made too many bone-headed mistakes to allow me to get very comfortable with huge concentration.

Ha

 

[REWahoo]

There is nothing inherently risky about individual stock trading, or inherently safe about buying and holding index funds.

The reverse of this statement is equally accurate...or inaccurate.

 

[haha]

Considering the audience, I figured that would be like telling a church full of nuns that god approves of chastity.

Just to point out a clear danger to index funds that is inherent in the usual cap-weighted index -- over time you become more and more heavily invested in the stocks that have gone up the most. So you had better be a believer in The Big Mo.

Ha

 

[Dawg52]

There is nothing inherently risky about individual stock trading, or inherently safe about buying and holding index funds.
For the last few years I have taken realized CGs ~$100,000 each year. I have already booked that again this year. That doesn't necessarily mean that the gains were all generated during the calendar year. But overall, it seems to be the gift that keeps on giving.

I sometimes get envious of the very low taxes that some of you are paying.

Ha

I would be more than happy to pay a large sum of taxes if I could book the kind of gains you have earned. Good job! Float me some tips.

 

[Lsbcal]

Just to point out a clear danger to index funds that is inherent in the usual cap-weighted index -- over time you become more and more heavily invested in the stocks that have gone up the most. So you had better be a believer in The Big Mo.

There are some exceptions to this like a small cap value fund (e.g. Vanguard Small Cap Value, visvx) where the stocks that go up a lot will exit the fund due to too large a market cap. I don't have any particular axe to grind. Have more actively managed funds then index funds. Even have one stock position left over from my stock picking days and will probably exit this in the next 2 years to take advantage of zero cap gains rates if you stay in the 15% bracket. I started a small position today in visvx in an IRA.

 

[chinaco]

Well, if the definition of amateur is someone who doesn't get paid for what they do, then he's probably right. I'd be more willing to take risks if I was being paid a lot to...

Let me finish the sentence: take huge risks with other people's money!

 

[Spanky]

Let me finish the sentence: take huge risks with other people's money!

Hedged fund mangers are very good at doing that.

 

[hankster]

There is nothing inherently risky about individual stock trading

Ha

There was for me because I sucked at it

Seriously, I agree with you. I was day trading and I came to understand that I didn't have the time or patience to trade individual stocks the right way. I know people who do it right with an appropriate % of their portfolio and it looks like all the research and strategy stuff is just not for me.

 

[mathjak107]

ill say it for the 100th time... ITS NO LONGER ABOUT GROWING RICHER FOR MOST OF US, THIS STAGE IS NOW ABOUT NOT GROWING POORER

 

[Zathras]

There was for me because I sucked at it

Seriously, I agree with you. I was day trading and I came to understand that I didn't have the time or patience to trade individual stocks the right way. I know people who do it right with an appropriate % of their portfolio and it looks like all the research and strategy stuff is just not for me.

There is a BIG difference between day trading and trading individual stocks.
I am no where near being a day trader. All of my trading is done in individual stocks.
I am well diversified and no, I won't get rich off my investments.
I am just fine with raises each year (dividends) with a modest increase in portfolio value that beats inflation over the long haul.

 

[mathjak107]

i too realized along time ago i suck at buying individual stocks like alot of people who tell the truth about their losers too. . im not as smart as everyone else who manages to pick just the right stocks in just the right industry in just the right sector at just the right time in just the right market sentiment for that issue. . and even if i got all the above correct i still wouldnt know what their competors are doing. oh yeah then there is that missed earnings report that would send me falling 20% in a day.

no thanks i loooooove funds. no individual company risk for me anymore, market risk is enough thank you

 

[Lsbcal]

mathjak107, I agree with you. Have perhaps hung out too long reading the Bogleheads forum. But I still do cling to a good slice of actively managed funds like Vanguard PrimeCap, D&C stock and international, Harbor International. Index funds include Vanguard MidCap, TSM, and recently Small Cap Value. Also I have been known to buy large helpings of individual TIPS when real rates are highish.