Diversification Overrated?

[wildcat]

Just wanted to get some opinions from people on how much of an emphasis they put on diversification during their years of saving. Do ER really diversify or stay concentrated? Let the debate begin!!

 

[Nords]

Re: Diversification is overrated.

Buffett says that diversification is flat-out wrong.

But he also says that uneducated or uncaring investors should stick to index funds.

There are many paths to ER. I prefer concentration.

 

[Jarhead*]

To each his own.
Only way to know for sure is through a rear-view mirror.
I concentrated on Real Estate to ER.
Now, the only thing I concentrate on is tournament golf, and fly-fishing.
Gave up on becoming wealthy a long time ago, and decided to settle for having the time to pursue,as much as possible, the stuff that my wife and I enjoy.
As Uncle-Mick stated, more than one way to skin a cat.

 

[Marshac]

Just wanted to get some opinions from people on how much of an emphasis they put on diversification during their years of saving.  Do ER really diversify or stay concentrated?  Let the debate begin!!  

Many here foresee a turbulent future in the markets with lower than historical rates of return. Personally, I would be uncomfortable with everything allocated into a single asset class or geographical region given such a scenario.

Regarding Buffett- Sure, he has a lot of his wealth in BRKa, but you have to admit, Berkshire is a pretty well diversified company.

 

[unclemick]

Yep

Took thirty years to convince myself how dumb I was. Meanwhile - diversified max 401k via DCA ala S&P 500/ GIC's.

Meanwhile - hat's off to Buffett's ability to concentrate and California real estate.

Male and biological - never say die - still trying with 15% in individual stocks.

Heh, heh - It only takes one - my luck, I'll probably pick that stock from the rest home - too late to move to the Bahamas.

 

[RD]

Just wanted to get some opinions from people on how much of an emphasis they put on diversification during their years of saving. Do ER really diversify or stay concentrated? Let the debate begin!!

During the years of saving? nope, all in aggressive equity funds and company stocks.
Now, during distribution? kind of, most of it in conservative equity funds, small percentages in somewhat aggressive equity and balanced funds, the rest in cash.

 

[grumpy]

It depends on how much risk you need to take to reach your goal. I calculated that I could reach my ER goal with only modest returns. I was not willing to take additional risk that poor returns would derail my ER plans so I built a widely diversified portfolio of stocks and funds. For my individual stocks I invested in 22 dividend payers in 12 different industries. I underweighted techs. Among my funds I hold 25% in internationals, 15% small cap, 10% mid cap and the rest in large cap with a value orientation. For a while I held 10% in triple tax free bond funds. I currently hold only a small position in I-bonds. I retired in 2002 just after the markets peaked. My diversified portfolio held up very well and has now recovered nicely.

Grumpy

 

[Hyperborea]

Those that "get lucky" with the one big score are sure to say that diversification is over rated. The majority who didn't get lucky wish that they had diversified. Putting it all down on one number at roulette can win you big bucks too but is it a smart move?

 

[wildcat]

In terms of Buffet - He only buys at low prices and the low price eliminates some of the risk. But I don't anyone with his skill. I admit I have invested all my "play" money on a single stock but I am young & felt comfortable with the risk. In terms of what it takes to get to ER, does it depend on how much you save more than how much you diversify? Your thoughts?

 

[John Galt]

Neither. It depends mostly on what's between your ears.

JG

 

[Hyperborea]

 In terms of what it takes to get to ER, does it depend on how much you save more than how much you diversify?  Your thoughts?

The higher your savings is as a percentage of desired income in retirement then the less of an effect your investment returns have on the whole process. The higher this is then the less time you have for compounding to take effect.

 

[Hyperborea]

Neither.  It depends mostly on what's between your ears.

Social security and a working wife.

 

[John Galt]

Hello Hyperborea Well, I didn't have either (SS or a working wife) when I left
the workplace in 1993.
I made it from 1993 to 2002 without these
"advantages" and increased my net worth significantly over that period. Anyway, I fail to see why a working wife and the proximity to SS are bad things. Looks pretty sweet from where I sit. Besides, I would have made it work
regardless. I may be the only one here who believes this, but I maintain it's 90% brainpower/willpower. Everything else
is way back in the pack IMHO.

JG

 

[wildcat]

JG -

Could you share some advice on getting to the ER stage or how you managed to do it? Appreciate it.

 

[John Galt]

Hello Wildcat! This story has been told more than once, but for those
who have heard it, please bear with us.

In 1990 I bought a small manufacturing company. It's
best days were behind it, just as mine are now. After
working very hard for 3 years I decided I wanted to "semiretire". I was nearly 50, many friends had died, and was tired of "busting my pick" to support a very high
consumption lifestye. We were LBYM (living beyond your means) for decaeds. Many on this forum don't think that semiretirement is
"real" retirement. In any event, in August 1993
I shut down my company and over the next 5 years
I sold off most of the assets while I worked part time
and/or consulted on a contract basis. In 1998, I
went through a divorce and decided I could retire
completely even with only half of our assets. So, I cut
my lifestyle to the bone (total budget first year was
around 15K). I continued to convert any and all non-
income producing assets to investments which could
either be used (our house) or would throw off income.
(No lazy money!)
That process is pretty much complete now. I have 50% of
our net worth in real estate (some income producing)
and 50% in bonds/CDs/notes (no equities). SS kicks in
in Sept., 2006. If wife retires then (she works part time now) our income would continue at about its current level. Real estate provides inflation protection.

I went against the conventional wisdom and made it work. I do not recommend my path to others, although
with hindsight I can offer suggestions on opportunities
I missed. Those many years of livin' large and spending
without any thought to how it all might end didn't help.
However, I was just as guilty as my ex. It was quite a party though

JG

 

[wildcat]

JG -

Thanks. I enjoy hearing/reading how others have managed to pull off the ER stunt. I just try to learn from others. Anyone else that wants to spill the beans may do so as well.

 

[riverrat]

I'm getting the Texas holdem poker bug. Maybe because I see that the winners go "all in" at the right time.

 

[MJ]

Hello Hyperborea Well, I didn't have either (SS or a working wife) when I left the workplace in 1993. I made it from 1993 to 2002 without these
"advantages" and increased my net worth significantly over that period.

ERing involves a much longer period than 10 years.
Just to keep things in perpective, how well would you be doing over the next 20 to 30 years (long life to you JG), if you didn't have a working wife or SS. I don't count eating dog food as being successfully ER'd. Didn't you mention that you were living with your folks for a stretch of time after your divorce. That would be a great way to increase your net worth too.

Just trying to put a little reality in your ER success story.

MJ

 

[John Galt]

Hello MJ. Well, I am a big promoter of "reality".

I never lived with my parents after retiring. What I said was that after I moved back to Illinois and was still single, I ate a lot of meals with my parents. I had lived far away for years and we all enjoyed this "reunion".

We could live without my wife's paycheck. She could retire at any time. We have discussed it. She has opted to continue working. The paycheck is very helpful
obviously.
Could I stay retired without SS? Maybe. It wouldn't be
a pretty picture though.

JG

 

[RD]

I enjoy hearing/reading how others have managed to pull off the ER stunt. I just try to learn from others. Anyone else that wants to spill the beans may do so as well.

Just a general comment not directed toward anyone in particular but on an internet board, if you think that it's too good to be true it probably is.
Regarding pulling off the ER stunt, it's probably been said before but it's mostly hard work and luck. For me, it's that but luck is definitely overweighted.
Back on the original topic, I didn't diversify when I was working because I didn't know there is such an animal so I overweighted in company stocks (here's one area where luck came in, don't do this at home). I invested in aggressive funds because I thought that retirement is only for wimps and I would always live on a working salary until I can't work anymore and then life is not worth living then. What's an idiot

 

[Nords]

In terms of what it takes to get to ER, does it depend on how much you save more than how much you diversify?  Your thoughts?

I think it's quicker & easier to raise your savings rate (by cutting expenses or working for more income) than it is to raise your investment returns.

Of course long-term, unless you enjoy working, it's probably better to develop financial & investment skills. But many ride the razor's edge by hoping to accumulate enough ER funding from working & saving before burnout.

But what's between your ears has everything to do with how successful you'll be at working, saving, or investing. If ER's not a top-three goal then it won't happen...

 

[sgeeeee]

I've read enough success stories on enough retirement boards to have learned that there are a multitude of paths to ER. Some people make it with concentrated equity portfolios, some people make it with broad index funds, some people make it with real estate and some people make it with nothing but bonds. All of them seem convinced that their way is the right way and that everyone else is a fool.

Since each person's situation is unique, there seems no way to draw conclusions about the optimum solution . . . especially when you consider that we are speculating about what the best technique will be in the future.

I think the most important thing is LBYM. If you get that right, you will have money to invest. And as long as you don't do anything too terribly stupid with it, you'll reach retirement okay. I think the most important factor in choosing what to invest in is probably your comfort with that investment. 8)

 

[wabmester]

Here's a crazy idea. If two approaches seem equally reasonable, allocate 50% to each approach.

 

[R.H.]

Salaryguru,

I agree . . . LBYM is the safest, surest route to ER. My investment skills are horrific, but my wife and I are wizards at LBYM. Because of LBYM, my wife and I are about 2 years shy of the $1M nestegg we figure we need for FIRE. For the past 6 years we've been saving 50 - 75% of our salaries. Half of it is tucked away in EE and I-Bonds (as I said, my investment skills are pathetic). However, LBYM has "saved our bacon." I just hope that between now and the time we pull the plug I learn enough about investing to make the nestegg last.

RH

 

[John Galt]

I agree 100% about LBYM being the "safest and surest"
method. Wish I had done it.

On a related topic,
for those of you who read the Dolly Freed book
(link posted by Blackhillsbob), you realize
that if I go "all the way"
to possumism, you will be deprived of my pithy
commentary, wry
observations and insightful recommendations
I will be selling my computer and other doodads.
(Guess I could still post at the library). I think
this possumism concept really appeals to my Luddite/minimalist
tendencies. Have not pitched the idea to DW as yet.
That should be interesting

JG