Diversify your selection of stocks?
Diversification is one of the most basic elements of stock investing. Even a newbie such as myself knows what is it about. And so far, it has proved to be a very useful strategy for me. It’s just like the saying “never put all your eggs into one basket”.
However, there ARE some investors who prefer to focus on putting their eggs in 1 or 2 baskets. Both has their own pros and cons. For those who prefer focus than diversification, it actually saves them more time. Rather than doing analysis and monitor many different companies and industries, they only need to pay full attention to few. They might not be jack of all trades, but they are the experts in those few industries.
On the other hand, if you’re diversifying your stock investment across multiple different industries, then you will likely spend a lot of time and efforts trying to keep up to date with the data and the news. As a result, you might miss out some important details.
So what should you do? If you don’t diversify, what if you make that one big mistake while analyzing your industry? You might end up suffering heavy losses. But if you do diversify, you might take too much efforts and energy to keep up to date with all the industries.
For me, I will definitely diversify but only to the few sectors which I know quite well and also to the few companies which I know. I will not invest in a company which I hardly know. I normally invest in Finance, Plantation and Trading/Services. Lately, the Finance and Plantation sectors have been hit quite hard and I’ve lost a lot. But if I did not diversify some of my investment to Trading/Services, I would’ve been hit even harder.
So my suggestion is to choose few industries to focus – maybe 2 or 3 at most. At then, choose few companies out of those selected industries. Unless you got A LOT of time, then maybe you can focus more than that.
Hope it helps.
p/s…. but do bear in mind that the current economy situation is quite volatile. All the industries might be hit quite badly so do your selection and analysis properly. Plan for at least 6 – 12 months. If you cannot hold that long, then don’t invest now.
p/s….. on another note, it is also a good idea to diversify your overall investment portfolio to other investment types such as real estate, bonds, unit trusts, commodities or Fixed Deposits.
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Comments
@ boringest
Thanks for the article. 
I think it really depends on the investors and their characteristics. It’s true that those less diversified funds will earn more (generally) because you only focus on those few industries that you are familiar with. And when the crisis hits, you will know beforehand and when to run away. But if you mistime it, then you will suffer pretty badly as well. Pros and cons to each. But if you look at 2 funds managed by the same quality of experts, then maybe the one less diversified will earn more.
I wonder if things will work better if the diversified portfolio pick on stocks which outperform their respective industries, just like how the less diversified one works? :T
You might be interested in this link:
http://query.nytimes.com/gst/fullpage.html?res=9F01E0D61338F932A25757C0A9629C8B63
Quote from article:
“Over the 16 years studied, the funds with the highest divergence index readings — those with the least diversification — produced the greatest average returns. By contrast, the most diversified funds lagged behind the market. The researchers found that the 10 percent of funds that were least diversified performed 1.9 percent a year better than the 10 percent that best represented the broad stock market. This result persisted even after adjusting the performances of the least-diversified funds for any greater risk they might have incurred.”
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