How Should Investors Diversify?
Any investor who has done some research is well aware of the advice diversify your investment portfolio to minimize your risk. It makes sense; we as cautious humans quickly understand the old proverb "Don't put all your eggs in one basket". But when it comes down to the dollars and cents, does investor diversification benefit the smaller investor?
Where we are at any point in our investment life cycle will have a huge bearing on our tolerance for risk. Some people are naturally risky, others much more cautious. For those starting out in their working careers the money they invest is very limited and they don't want to lose any of it. For those in the wealth accumulation years they tend to be much more risk tolerant. For them there is a bigger base so a small loss isn't as important and they have years to recoup any losses. For those at the end of their working lives or in retirement, the risk profile is probably much lower. All these factors mean that as individuals, our attitude to diversification will be different.
The problem with diversifying is that while you may limit your risk, you may limit the gains you can make as well. If all your money is in stock picks and the property market has a boom you will not participate in any of these high returns.
For the small investor size also matters. He will not have the bottomless investment pool to be able to buy significant quantities of the prescribed, balances share portfolio, plus the property investments plus the fixed income options. Or if he tries he will end up with uneconomically sized parcels.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end, just as we are individuals, our investment diversification decisions must be tailored to our circumstances. - 23208
Where we are at any point in our investment life cycle will have a huge bearing on our tolerance for risk. Some people are naturally risky, others much more cautious. For those starting out in their working careers the money they invest is very limited and they don't want to lose any of it. For those in the wealth accumulation years they tend to be much more risk tolerant. For them there is a bigger base so a small loss isn't as important and they have years to recoup any losses. For those at the end of their working lives or in retirement, the risk profile is probably much lower. All these factors mean that as individuals, our attitude to diversification will be different.
The problem with diversifying is that while you may limit your risk, you may limit the gains you can make as well. If all your money is in stock picks and the property market has a boom you will not participate in any of these high returns.
For the small investor size also matters. He will not have the bottomless investment pool to be able to buy significant quantities of the prescribed, balances share portfolio, plus the property investments plus the fixed income options. Or if he tries he will end up with uneconomically sized parcels.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end, just as we are individuals, our investment diversification decisions must be tailored to our circumstances. - 23208
posted by X - Men @ 2:52 AM
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