To Diversify Or Not? A Simple & Highly Effective Question To Ask Yourself To Find Out.Adam Parris
No doubt you’re interested in investing your hard-earned moolah into one of the greatest wealth machines available – the share-market.
But the financial media keep telling you to diversify. Often quoting fluctuations in share prices as evidence of risk…. it’s not, it’s volatility.
By confusing volatility with risk leads us to the most persistence myth that exists which is; ‘You must diversify among different industries.’
Which means you should own a few shares in different industries, like transport stocks, bank stocks, retail stocks, utility stocks etc.
But because these ideologues believe that volatility is risk and that if you only invest in one industry, say buying airlines stocks, that it takes one negative shock to drag down the share prices of all airlines, thereby you’ll lose your money.
The observation that different industries are uncorrelated has some truth to it. But a falling share price is not always a reflection of the underlying business’s performance, so it doesn’t make sense to sell just because the share price fell.
It may well be a great time to make the most of this opportunity by purchasing more shares. Because over the long-term a share price follows the company’s economic performance.
But, if you wait till a share price begins rising before buying, it’s like waiting to ask an attractive girl out on a date after she gets a boyfriend.
A sound premise – different industries are uncorrelated – used to support an unsound conclusion – diversify across industries – will lead to unsatisfactory investment returns.
Let’s cut through the BS with this simple highly effective question.
Q. Is it possible for me to understand the economics of specific businesses?
If you answered no, then all you need to do is periodically invest in an index, which owns a large number of businesses in your country. Some index funds include global businesses which are worth looking into.
Or did you answer yes?
Then, if you can find 5 to 10 sensibly-priced companies that possess long-term competitive advantages, conventional diversification makes no sense. It is apt to hurt your results and increase your risk.
But did you want to say yes?
You’ll be interested in the the Share Investors Blueprint… Which is a step by step investment blueprint for investing your hard earned money into the share-market. Learn more here.
You will learn how to find and invest in those 5 to 10 companies that possess long-term competitive advantages.
Yours in Investing
Adam C. Parris
Article by Searching For Value