Diversification is not putting your eggs in one basket. Basically, don’t bet your house on any one investment. Many asset managers tell you not to “over diversify”. They can rotate in and out of stocks at the right time. They like to throw the term “tactical” at these times too. I have this super cool article to share with you. It was sent to me a good friend. Full disclosure: he works at an asset manager but certainly never says tactical nor rotate. We just couldn’t be friends if he did. :)
The article is tongue-in-cheek. It highlights all the “bad” things that come with diversification. In the end, however, we see that we can’t win all the time on every investment at the same time. We need an appropriate strategy that we are able to stick through good AND bad times. The articles says it best:
This is why investing is not easy; why successful investors know they have to remain focused on the long term. Owning a diversified portfolio of index funds sounds simple enough, but we are so prone to get in our own way. Hear this: the single worst thing you can do for yourself in an environment like this is to start making changes to your investment policy. (By the way, if you change your investment policy based on market performance, you don’t actually have an investment policy). You don’t need to have the “right” asset allocation (such a thing does not exist), you need to KEEP THE ONE YOU HAVE. If you have thoughtfully constructed a diversified portfolio of investments, nothing is wrong with it. The only thing you can do to make things worse for yourself in the long run is to change your allocation in response to weak performance from certain assets. Don’t do it.
Link to story: