In the game, the market is controlled by the roll of the dice. They went against conventional wisdom and the payoff was huge.
That’s why investors today think they can do it, too.
However, we also need to realize that for every success story, there are 10 people who lost everything by going all in on a stock they just knew was going to succeed.
The risk of investing without diversification is too much.
What do you think…does investment portfolio diversification still work?
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diversification, risk and reward, investors, investing, definition of diversification, get rich quick, mutual funds
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A common lesson from a children’s story book has become one of the guiding principles for investing: “Don’t put all your eggs in one basket.” But lately, I’ve come across a few articles where people are questioning the wisdom of diversification. In other words, if you want to increase your return, you must be willing to increase your risk. I’m sure there is someone who has made a lot of money by investing everything in one stock. There are probably thousands of people like that. They will often reenter the market with another gamble and eventually the risk will catch up.
Take the slow, steady, and diversified approach. Today, we are going to ask the question – could you make more money investing if you did not diversify?
But, first here’s a quick definition of diversification: “to spread out your investments amongst different types of funds”.
Photo via Wikimedia Commons
The Theoretical Answer
Theoretically, you can make more money (investing or otherwise) if you do not diversify. When you are diversified, there is probably something going up when everything else is going down. This feed is provided for the convenience of Moolanomy’s subscribers. You cannot get one without the other. If, however, it goes down, you will lose everything.
The person who risks everything in Stock Ticker either finishes first or last.
Going all in on an investment means you risk everything. At least there is something holding its ground better than others.
Diversification has a built in ‘plan B’ in case you were wrong.
Sometimes, emotional security is more valuable than financial gain.
The Danger of Going All In: Investing Without Diversification
When I was a kid, I used to love to play the game Stock Ticker (yes, yes, I still love it). Conversely, if you want less risk, you will need to sacrifice your potential for gains.
I believe this one investing lesson could save investors millions of dollars annually. Those who seek to get rich quick by investing in something with unrealistic gains usually end up losing everything.
Two Reasons Why You Should Diversify Your Investments
The long term results are better
The turtle still wins. Having a third in each fund would only yield a 15% return, while fund #2 yielded a 20% return.
Diversification and Risk
So, why should you diversify your investment portfolio? Let’s say, for example, there are three mutual funds.
Fund #1 increases 15% over the year.
Fund #2 increases 20% over the year.
Fund #3 increases 10% over the year.
Theoretically, you would make more money IF all of your money was in fund number #2 instead of a third in each fund. Anyone who makes a big killing off a single stock will rarely walk away unscathed. It is better to slowly get to a million dollars than risk everything to get to ten million.
Emotional security
Not being diversified can be emotionally wearing. If a share drops below the zero line, you lose everything.
The game really doesn’t have an ending, so we usually just say we are going to total up the value of your shares in x # of minutes.
The winner of the game is almost always the person who will sell all of their other shares and buy all the cheapest share. If in those last rounds that share goes up, you have significantly increased your value.
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This post was written by admin on March 13, 2010
