A Great Example of Why You Need to Diversify

by Investing School on March 3, 2009

I was reading this month’s Money magazine that featured Julia Andres, a 58 year old sales executive.  In 2000, she had about $775,000 in her retirement savings pretty much all invested in Citigroup because she worked there for around 20 years.

She basically lost 50% of everything she had by 2002 because of the tech bubble and after that, she worked with a financial planner to slowly diversify her portfolio.  The great story was that by 2004, Julia sold all of her Citigroup stock and instead were invested in a mix of stocks and bonds.  By 2008, she only lost 20% instead of 95% that a Citigroup stock would’ve lost (she would’ve lost another 3-4% of the original investment in 2009).

To put it into context, she would’ve had about $20,000 left in her retirement savings if she held onto her Citigroup stock.

Let this example remind you why you shouldn’t put all your eggs in one basket.  Do you still have a significant portion of your funds in one asset class (worst yet, in one stock)?  If so, make sure you rebalance your portfolio or risk losing it all.

Don’t say I didn’t warn you.

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{ 4 comments… read them below or add one }

Jorge March 4, 2009 at 3:42 am

I learned this lesson pretty well over the last year. While I didn’t have my investments concentrated in any one company, I had 100% of long term savings in stocks.

So even though I thought I was well diversified by holding all index-funds, I got shellacked as my entire portfolio is worth 50% of what it was a year ago!

Time to start adding some bonds to the portfolio!


David Leonhardt March 4, 2009 at 5:22 am

Life is about balance, and investing is no different. This is a great example, and the world could use more real-life, typical examples that ordinary people can relate to. I’m going to tip this one.


Chiko777 March 4, 2009 at 5:34 am

Great story, but I chose to disagree with the whole idea of diversification (at least for now). Her story is a little bit different and I agree she did the right thing by diversifying, but that advice doesn’t fit all. If you are young and building capital or wealth (like myself), you have no business diversifying. Diversification is safe, but it prevents you from making high returns. When you are young, you need to take as much risk as possible because you have a lot of years ahead of you to fix any mistakes.

I am 22 years old now, and I have a goal of being financially independent without depending on a job by 25 years old. The way I plan to do so, is by TAKING RISK, which means not diversifying. For example I have 100,000 shares of one company, that’s a big risk. But think about what happens if that company gains 50-100% in share value.

Taking risk at a young age is a great thing and diversifying can slow you down on the road to creating wealth.


Investing School March 4, 2009 at 11:23 am

Chiko777: What you are doing is VERY risky and of course you can become rich this way (many have) but mathematically, it doesn’t work in your favor. Taking risks with your investment because you are young doesn’t mean that you can’t diversify at the same time.

While I don’t know the exact investment you are making, what you are doing can be related to gambling. You can win, but more people lose employing the same strategy.


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