Money For the Rest of Us: Why Diversifying Your Portfolio Feels Awful
Diversification is a concept most investors are familiar with. The idea is to own a variety of different assets. More importantly, these assets will behave differently under different market conditions.
This can smooth out a portfolio’s returns by providing assets that perform well, even during poor markets. Today, most investors use ETFs or other funds to diversify into a variety of stocks and even bonds. Even with easy, one-stop ways to diversify, however, the concept can sometimes invoke negative feelings.
That makes sense for a few reasons. First, by diversifying, we’re moving capital away from our highest-conviction ideas. There’s less money to invest in the trades we want to make, out of a sense of “having” to make a trade for diversification.
And, diversification can help lead to portfolio creep, where we keep adding positions even when we already have a diversified portfolio. 20-30 different stocks should be more than sufficient to diversify.
But even investment legend Warren Buffett, who has come out against diversification, has allowed his portfolio at Berkshire Hathaway to grow to 48 positions.
While there are some negatives, diversification plays a crucial role for mitigating extreme moves in a portfolio.
And today’s investors can further diversify not just across sectors, but internationally as well. With the US dollar showing some strength right now, international companies are likely to perform well as it means that other currencies are relatively weaker.
