365QOD- Day1235

A Basket Full of Cracked Eggs

“Smash… the basket was destroyed”- my paraphrase of a story an investor told me

Many years ago I did an investment presentation to a Fortune 10 company and after the presentation one of the attendees asked me for some advice.  His words were that he had picked his former employer’s stock and when that employer crashed so did his stock.  I was not surprised.

According to James Altucher:

Lesson#5 Diversification

I have never been too big on extremes.  I do not think we should invest in single instruments.  Similarly, the other extreme of having many investments is no better.  So what does diversification mean to me?

Diversification means having multiple sources of income coming from very different instruments.  Work brings in income but only a minority of your investments should be in your company stock.  If both sour then you are left with the basket fulkl of cracked eggs. 

Many people think of index funds or even segment funds as diversification.  I do not.  You can often place the plot of many foreign mutual funds vs. index funds and they will match in shape.  How can a Brazilian fund match the US market?  Well, the world is very interconnected and you do not get the disconnect that you would expect.

If I am focusing on ETFs then in my world picking several consistent investments is better than picking the hottest ones.  I want true performance and not something that will go up like crazy and come down just as fast.

SO pick a few mutual funds, a few stocks, a few ETFs, few sources of income, residual income, write books, etc. and you become diversified.  Do not pick too many because you will not be able to keep track of them efficiently and respond quickly if there is a need.  Keep It Simple Sweetheart!

Today’s question is:

“What does diversification mean to you?”