I Will Teach You to Be Rich
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One article got me really thinking was an article on diversification. I am starting to think that people can be too diversified to the detriment of portfolio performance. Essentially, if you are going to hold a bunch of stocks then why not just buy an index fund and be done with it. His quote is:
I recommended that he pick his best 5 stocks, sell the rest, and think carefully about where to put the money–either back into his select 5 stocks or an index fund (or both).
Is this more risky? Yes, if you are just picking stocks out of thin air. However, if you are doing your homework and selecting stocks based on sound fundamental analysis then you are reducing your risk levels if you are committed to holding them for a long period of time and let the good performance of the company play out over time through an increasing stock price.
3 Comments on this post
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yielder said:
I would strongly, strongly disagree with holding 5 stocks. Ten is dicey; 20 is better especially if you are investing for dividend growth. Concentrating a portfolio may work for Warren Buffet who is able to know management the way that no amount of “doing your homework” will ever be the same thing. Because you cannot know the company at the level that Buffet does, his kind of concentration is extremely risky for the retail investor. Are you willing to lose the income and take the capital hit that a dividend cut will lead to?
I agree that you can hold too many stocks but I don’t think that indexing is better than reasonable diversification. If you can’t analyze stocks or don’t have the interest or the time, then something like XDV and no stocks at all makes sense.
May 1st, 2006 at 7:55 am -
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AdityaMay 3rd, 2006 at 7:04 am -
Mark said:
The Iwill… blog is interesting, but Ramit blog’s combination of peeks into the lifestyles of the rich and infamous and sound financial advice is both provocative and immature. Trying to redefine economic concepts such as diversification away from academically accepted numbers of stocks towards a smaller number of more carefully watched stocks is nonsense. As I recall (presently, his site does not go to the link, but I remember reading it), he insulted his friend’s shirt, and then called his sound approach to investing stupid. The first comment is not blog-worthy. The second, wrong.
Ramit’s site has some interesting nuggets, but take what he says with a grain of salt.
February 25th, 2007 at 1:23 am
