Diversification Lets You Keep Your Shirt

by Investing School on June 24, 2009

Every time the stock market plunges like what’s happening lately, I’m thankful that I’m diversified.

The Dow – Down 2.35%
Nasdaq – Down 3.35%
S&P 500 – Down 3.06%

Yet, my portfolio is down only 0.38%. No, it has nothing to do with good stock picking, nor perfect timing since I didn’t make any trades today. The only reason why I’m doing better is because I’m diversified. For the most part, everything was down but my bigger holdings, a few defensive stocks, didn’t flinch at all.

When diversification comes up, I hear this a lot “But I need the capital to make trades”. Yes dear, but when the market tanks, diversifying is the only protection you have against a total wipe out.

It’s not just me saying this. I know you watch all these so called “professionals” and they talk about buying this and selling that, but if you look at everything they own, you will notice that the majority of their assets are in a diversified portfolio. They do it to manage their risk.

Sure, having more capital will give them a higher chance to make even more, but it also exponentially increases their chances to go broke. To them, it’s called “risk management”. I urge you to do the same.

If you are just starting out, I can understand why you feel the need to put all the capital you have saved up to buy that one stock. If you are at this stage, then I suggest waiting until you have saved more money. The market isn’t going anywhere, and having more capital to play with will also give you more comfort in making calculated and unemotional investments. The easiest way to lose money is when you bet big on any one security and it goes the wrong way. You can either learn the hard way or just listen to people (like me) who’ve already made those mistakes for you.

It’s rough out there. Don’t be stupid and throw everything in one basket

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