Why be Diversified in Times like these?

By TheWild1 at 24 October, 2007, 3:00 pm, Categories : Financial Markets

One of the most famous rules, when it comes to investing, is to always be diversified. Most investors will tell you when it comes to picking stocks you should try and pick companies from different sectors, and for the most part that is a pretty true and significant rule (especially if you are new to trading). Jim Cramer even has a section on his show dedicated to diversification every Thursday. Keeping a portfolio diversified is supposed to help lower the risk of losing all your money at once. For example, if you had all your money invested in the cheese market and suddenly all the cheese disappears, then you most likely will lose tons of capital, but if you put some of that cash into the mattress market, then you lessen the chance of blowing as much money.

In today’s market I have seen things different. Right now my portfolio is probably the least diversified it has ever been, and so far it has paid off big time. Most of my money is in the technology sector. Now I am sure there are tons of other stocks in different sectors that are doing well, but there has really been nothing as stable as the technology sector. There have also been many sizeable gains. If I had been more diversified during this time, then sure I would of still made money in the tech sector, but I might of also lost some money that was invested in other areas, thus lowering my overall gain. So in this situation is diversification really all that good, or should you just try your luck and and ride the success?

To me the idea of diversification (in stocks that is) seems a little out dated. With tools such as stop loss orders and up to the minutes charts, many people can now track the market on their own, and keep a good grasp of their own holdings; moreover, trades can now be done in under a second. Technology has helped kept everybody connected and allowed people to access tools and information like never before. If I want to know what the latest news on a stock is, then I can easily find it at 100 different places in barely no time at all, unlike before where you might not know something until a couple days later. So with all these advancements in technology, I might as well just keep my money in the technology sector until everything else catches up.

Comments

The Digerati Life October 28, 2007

I’ve been reading about your activities and it sounds impressive. You must have a talent for trading then. I, however, don’t so I go with the diversification program. Have done very well in 18 years of doing it. can’t complain! My brother-in-law works in finance for a private equity firm and all he does is trade. Young, brash, ambitious guy with a thirst for beating the market. I keep telling him in the end I’ll still beat his record. So far I believe I am…. it’s about the risk aspect. With less diversification you take bigger risks. It can surely pay off well if you are in the right but most people aren’t. Kudos to you for being in the right, question is how long does the trend last?

These days, I don’t even watch my portfolio — it’s grown so much that I don’t bother playing with it anymore. So I let it fly on its own with complete diversification. If the dollar dies, I’m covered. If inflation goes up, I’m covered. If the market flies, I’m there. If the housing market collapses, I’m waiting in the wings to buy in. I have never been more excited than this opportunity of a poor housing market to really rake it in when the time comes.

Good luck with your endeavors! I enjoy reading about them.

[Reply]

TheWild1 October 28, 2007

yeah that problem is true.. how long does the trend last? who knows.. but lets hope I am out before it does..

also i agree with a larger portfolio it is best to diversify and i am guessing mine is probably not as large as yours

[Reply]