Investor Diversification 101
For most people the old adage about not putting all one's eggs in one basket makes perfect sense. Most people can see how this applies to their investing decisions. We by our very nature can be very cautious people and dislike the thought of losing money on investments. However does investor diversification really work for 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 smaller investor the amount they have to invest will determine the level of diversification they can achieve. We are told to have a number of different stocks, fixed investments, property etc. But to buy all these might end up with the investor having thimble sized investments in a number of areas, which just isn't sensible.
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 each small investor has to assess his risk profile and manage his investor diversification appropriately. - 23305
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 smaller investor the amount they have to invest will determine the level of diversification they can achieve. We are told to have a number of different stocks, fixed investments, property etc. But to buy all these might end up with the investor having thimble sized investments in a number of areas, which just isn't sensible.
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 each small investor has to assess his risk profile and manage his investor diversification appropriately. - 23305
posted by Mr. Forex at
4:34 AM
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