Tuesday, April 28, 2015

Why Diversify?

Ask Celladon. It's fun all the way until the last minute when you start to vomit.

12 month returns: +117%
13 month returns: +250%
14.5 month returns: -61%


There is very clear mathematical proof why diversification is good for you. However, I also do believe that there is such thing as di-worse-ifying, which is rampant and an excessive fetish for extreme diversifying. After a certain point, diversification has very marginal effects because of diminishing returns.

My personal stance is that basic diversification is absolutely necessary, even if you do have a single asset class portfolio. The diversification bonus contributed by the first few additions of independent investments are substantial.

At the end of the day, just know that if you diversify with asset classes (instead of only within asset classes), you're probably going to end up with very decent long run returns with reduced volatility that many would be jealous of.

The easy man argument against diversification is that "Diversification works.... until it doesn't!". Well, when all hell breaks lose, most things don't work. People that sell lower yielding "safer" assets like IG bonds or fixed deposits like to come up with that sort of defense to try and get them some AUM. It's not to say that their point is moot, but they are only arguing half of it.

There are many ways that lead to Rome. Just because Warren Buffet said so doesn't mean that 100% stocks is the only way to Rome. And that also doesn't mean that if we try to walk his path, we will get to Rome as well.

The romanticism and heroism of being of a hardcore chiongster with 100% stock allocation has to stop.

No comments:

Post a Comment

Observe the house rules.