Why You Should Never Diversify Your Portfolio
Based on the title of this post, most of people who know me will think I have flipped to the dark side of investing. I assure you I have not. Please allow me to explain.
Investors (and brokers alike) need to understand that there are two and only two investment philosophies. You need to choose between these two competing and diametrically opposed philosophies. The first philosophy espouses that timing and selection is the way to go; the second is that structured funds and coaching will ultimately be better for you.
Undoubtedly, we live in a timing and selection culture. The vast majority of Wall Street and its marketing message is designed to convince you that somehow they can time the market–either by getting you out of the market before a precipitous drop or get you in the market before a huge run up–or they can pick the winning stocks in advance. Unfortunately, the vast majority of investors have been duped into using timing and selection as their basis for investing. Let’s think about this for a moment.
If proper timing and selection was the panacea of investing then it would be difficult to explain why millions of investors lost trillions of dollars between March 2000 to the end of 2002. If would be equally difficult to explain why so many suffered massive losses in 2008 and 2009. Even if you doubt these facts, the hardest concept investment firms would need to defend is the idea of diversification.
Mutual fund companies have hundreds of funds with thousands of different individual equities. IF THEY REALLY KNEW WHEN TO GET IN OR OUT OF THE MARKET OR WHICH STOCKS TO PICK, WHY WOULDN’T THEY HAVE JUST ONE STOCK THEY “KNEW” WAS GOING TO BE HOME RUN? WHY WOULD THEY NEED TO DIVERSIFY ANYTHING? This is intellectual dishonesty at its finest. The very practice of diversifying a portfolio is their admission that they cannot time the markets or select winners.
We subscribe to the investment philosophy that returns come from markets, not managers. We diversify because there is no statistical evidence that you can time the markets or pick winners on a consistent basis. We invest in markets (asset classes), diversify according to investors’ risk tolerance, rebalance, and enjoy returns that markets have given to us over the long-term. We do this by using structured funds and coaching our investors.
You should NEVER diversify your portfolio…unless, of course, you don’t believe in timing and selection.
John Choi
Great post. The industry depends on their ability to hide the lie or change the subject. You would think people would have figured this out by now.
And you didn’t even mention overlap between the funds in the same fund family. Because fund managers can’t pick that one stock, they hedge their bets by having many funds, many of which hold the same stocks.
Good Post.
Good article John! Keep it up!
If you could time the market–why diversify? The very practice of diversifying a portfolio is their admission that they cannot time the markets or select winners. Great point and well put John.