Stocks And Diversification
Probably everyone can identify with the old proverb "don't put all your eggs in one basket". We all know is makes sense not to encourage such risk. The same thoughts can be applied to our investment portfolios - no one likes to think they will lose money. We are told to diversify our risk, but is investor diversification the best plan for everyone?
Where we are at any point in our investment life cycle will have a huge bearing on our tolerance for risk. Some people are naturally risky, others much more cautious. For those starting out in their working careers the money they invest is very limited and they don't want to lose any of it. For those in the wealth accumulation years they tend to be much more risk tolerant. For them there is a bigger base so a small loss isn't as important and they have years to recoup any losses. For those at the end of their working lives or in retirement, the risk profile is probably much lower. All these factors mean that as individuals, our attitude to diversification will be different.
Diversification, by its very nature, means that while our risks are minimized our exposure to profits can also be minimized. The money we have tied up in fixed interest is not available to take advantage of a red hot stock picks or a booming property market.
Another problem for the small investor is the smaller pool of funds he has to play with. It would be great to have a portfolio of property, a wide range of stocks and bonds, bank deposits and investment art. But to buy into all of these areas the small investor risks having such tiny investments in each that it isn't worth the effort.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end, just as we are individuals, our investment diversification decisions must be tailored to our circumstances. - 23223
Where we are at any point in our investment life cycle will have a huge bearing on our tolerance for risk. Some people are naturally risky, others much more cautious. For those starting out in their working careers the money they invest is very limited and they don't want to lose any of it. For those in the wealth accumulation years they tend to be much more risk tolerant. For them there is a bigger base so a small loss isn't as important and they have years to recoup any losses. For those at the end of their working lives or in retirement, the risk profile is probably much lower. All these factors mean that as individuals, our attitude to diversification will be different.
Diversification, by its very nature, means that while our risks are minimized our exposure to profits can also be minimized. The money we have tied up in fixed interest is not available to take advantage of a red hot stock picks or a booming property market.
Another problem for the small investor is the smaller pool of funds he has to play with. It would be great to have a portfolio of property, a wide range of stocks and bonds, bank deposits and investment art. But to buy into all of these areas the small investor risks having such tiny investments in each that it isn't worth the effort.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end, just as we are individuals, our investment diversification decisions must be tailored to our circumstances. - 23223
posted by X - Men @ 12:29 AM
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